Austria’s 100-year bond has returned a whopping 75% since 2017
be sleepier than the sovereign bonds of rich countries. In exchange for holding “risk-free” debt, investors accept low returns. In real terms, American ten-year Treasury bonds have returned just 1.9% a year since 1900, compared with 6.4% for shares. Since 2017, however, one bond issued by one rich country has returned a whopping 75%.
One of the main determinants of bond prices is the gap between their fixed coupons and prevailing market rates. If a bond is sold at a 4% yield and rates fall to 2%, its price will rise, since it produces twice the income that new securities do. This effect is modest for bonds near maturity. But over 100 years, this two-point gap is multiplied by 100 payment periods. As a result, ultra-long-dated debt is highly sensitive to jitters in interest rates.
The bond’s returns have drawn broad attention. For years, analysts thought that the floor for interest rates was 0%, because creditors would rather stash cash under mattresses than accept a negative rate. Now that negative rates prevail across Europe, this theory has been disproved. And the Austrian bond is the most potent tool to bet on a further decline in rates. If the ultra-long-term market rate fell by 1.1 percentage points, the bond’s value would double.
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