Duration describes the time it takes for a bond holder to get all their money back and/or the change in price for each 1% change in the interest rate.
In June 2020, Austria issued a 100-year bond with a duration of 66 years at a price of $98 and an interest rate of 0.88%. Due to high demand, shortly afterward the price was bid up to $140, pushing the yield down to an incredibly low 0.37%. Since it had a 66-year duration the +1% increase in rates pushed the price down to $64, which is a 58% drop from the peak.
This highlights that the duration of your bonds matter. If you don’t know the duration of your bonds, contact us and we’ll help you find out.
Looking back, the 0.37% yield must have been attractive to investors at the time, but the current risks of inflation, or that Austria will still be a functioning government in 100 years, may prove to be insurmountable.
Who knows? We still have 98 years before the final story is written.
Samuel serves as Senior Vice President, Chief Investment Officer for the Crews family of banks. He manages the individual investment holdings of his clients, including individuals, families, foundations, and institutions throughout the State of Florida. Samuel has been involved in banking since 1996 and has more than 20 years experience working in wealth management.
Investments are not a deposit or other obligation of, or guaranteed by, the bank, are not FDIC insured, not insured by any federal government agency, and are subject to investment risks, including possible loss of principal.