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A Bond Up 65% In 2019

Updated: Aug 23, 2019

From Seeking Alpha Source


Summary

  • An AA+ rated Austrian century bond has returned 65% in 2019, better than 99% of the S&P 500 components.

  • This article uses the tremendous performance of this bond to discuss the concepts of duration and convexity.

  • Rate duration and positive convexity can be important contributors to portfolios in times of market uncertainty.



One of the most interesting stories in capital markets in 2019 is the performance of a government bond from Austria. With a population of 8.7 million people, Austria would be the 12th largest U.S. state, nestled between New Jersey and Virginia population-wise. Why is the performance of a government bond from that sovereign so important to global capital markets?


On September 12th, 2017, the Austrian government issued a century bond with a 2.1% coupon maturing in 2117. Some bond market participants hailed it as a great victory for the Austrian government. They locked in what was viewed as low cost funding for the next 100 years. For context, at the time of the issuance it had been just 103 years since the assassination of Archduke Franz Ferdinand of Austria-Hungary had spurred the outbreak of World War I. A century is a long time in the history of a country, and the Treasury of Austria was believed to be appropriately forward thinking.


In 2019, the issuance of that century debt is already looking like an expensive mistake. On August 7th, 2019 - less than two years after the bond was issued - the bond was trading at 191% of par. The bond was priced at 116.5% of par to start the year. At 191% of par, it has had unrealized capital appreciation of 64%. Add in the just over 1% coupon return through the point in the year, and the bond had returned a whopping 65%. The Austrian government could lock in a century of financing for less than half the cost today.


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