Earlier this week, Petrobras, the scandal-ridden, junk-rated state-controlled Brazilian oil producer, sold $2.5 billion worth of 100-year bonds.
The idea of these century-long bonds sent some tongues wagging about so-called duration risk. This is one of the more esoteric topics in bondland, but can roughly be defined as the sensitivity of a bond’s price to changes in its yield. The greater a bond’s duration, the more sensitive its price is to changes in its yield. With investors putting their money in Petrobras bonds for 100 years, so the thinking goes, these bonds are heavily exposed to the movement of interest rates. But is this the case?
One way of measuring duration is to look at something called PV01 on your (handy!) Bloomberg terminal.
This tells you by how many cents would the bond price changes following a 1 basis point move in yield. For Petrobras’s new century bonds, it’s less than 10 cents.
How does that stack up against some other bonds? For comparison, Petrobras’s bonds due in 2044 have duration of roughly $1.16.
Now I don’t mean to say that the 100-year Petrobras bonds aren’t risky. Investors still have to consider interest rates. And they have to think about what the Brazilian economy and the Brazilian government and the global oil market and Petrobras, still in the midst of a massive corruption investigation, will look like over the course of a century.
But duration risk for these bonds is not as high as it might be given investors are being compensated with a relatively high coupon and yield. Where duration risk is a concern is with all those low-yielding government bonds where that might not be the case. As Mark Holman at TwentyFour Asset Management points out, the duration of those 100-year Petrobras bonds is roughly equivalent to the duration of the current 10-year German Bund which, at the time of writing, has a yield of just 0.66 percent and a coupon of 0.5 percent.
The lesson: maturity ≠ duration.
Also, duration risk can crop up in unexpected places.