There are three options for investors: move further down the credit spectrum, which can be difficult from a regulatory point of view; take advantage of illiquidity premium on offer; or push further along the maturity curve, he said.
Low yields have “naturally ... led to a move out along yield curves, and people have been investing more in longer-dated maturities to earn the more attractive yield on offer,” said Mark Dowding, London-based partner and co-head of investment grade debt at BlueBay Asset Management LLP. The “temptation to extend” the maturity of their bond holdings is “pretty natural,” he said, particularly so because longer-dated bonds are at least providing a positive return right now.
“There is a limit to how much credit or high yield investors can have in their funds, so they look also at some sort of duration extension,” added Cosimo Marasciulo, head of government bonds at Pioneer Investments in Dublin.
Mr. Marasciulo said the yield curve is steep at the long end, in part thanks to the European Central Bank's asset purchase program, which is buying up bonds to 30-year maturities.
“They can change the rules, but (right now) the very long end is not part of the QE program. That is why it tends to be very steep,'' he said. “Maybe the ECB will change the rules and buy this kind of paper, maybe not — but the difference with the past is we have seen a lot of new issuance coming in a relatively short time.”
The ECB's intervention in bond markets through its various quantitative easing moves has led to “a bizarre distortion in the eurozone government bonds market at the moment, caused almost entirely because” the central bank is only buying up to 30-year bonds, said Mike Riddell, London-based fixed-income portfolio manager at Allianz Global Investors. Investors can pick up almost 50 basis points from Belgium's 50-year bond vs. the 30-year paper, he said.
The spate of issuance of longer-dated bonds is not just a good move for investors.
“It is a strong positive for the countries involved as well, as they are able to lock in extremely low cost of financing for extremely long periods of time,” Mr. Lundie said.
Mr. Dowding said issuers are “eyeing up the fact that yields are at historically low levels, and saying this looks like a very smart time to be trying to extend the maturity profile of our debt, and lock in some really cheap funding costs by issuing ultra-long-dated securities.”
The recent issuance has been more issuer-led than investor-led.
“It is more a case of issuers would like to issue long-dated bonds — if they can secure 50-year funding at 1%, 1.5% or 2%, it looks like a good deal,” Mr. Dowding said.
Harris Gorre, head of the multiasset group at Investec Bank, said European insurers have been big buyers of long-dated bonds.
“This is far more focused on the insurance community in Europe, following the implementation of Solvency II,” a European directive that in January introduced capital charges on assets according to the risk they are perceived to carry and the degree to which they match liability profiles. The knock-on effect from these regulations has been building for some time.
Chris Redmond, London-based global head of credit at Willis Towers Watson PLC, said based on available data regarding the latest 50-year Spanish bond, the majority of buyers were insurers, plus some pension funds.
“German insurers in particular face a bit of a predicament in so much as they have written policies which have a 4% return requirement, and achieving that is clearly very hard given the current investment landscape for high-quality assets,” he said.
A 50-year bond with a 3.5% coupon “appears pretty attractive” particularly compared with other bonds, a significant volume of which currently offer negative yields. Insurers and pension funds are “being pushed to take on risks that otherwise they might not want to, in order to achieve the desired returns that they” need, Mr. Redmond said.