Hardened euro market shrugs off urge to panic

Euro deals have been flooded with orders this year despite the achingly low yields on offer and a eurozone economy that remains firmly stuck in neutral. Tessa Wilkie reports on what is driving demand.

  • 26 Mar 2013
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Sovereign, supranational and agency issuers will enjoy strong demand for their debt this year, despite the extremely low yields on offer in the sector, as their core investor bases have cash to burn and few places to put it.

A near captive audience of central banks and bank treasuries will not be put off by the eye-wateringly low rates of return available.

The majority of investors will prefer to park their money with highly rated issuers and take low yields on the chin rather than look too far down the credit curve. There aren’t many acceptable alternatives for these buyers to get into.

"While some investors might want to look elsewhere for yield, there aren’t many low risk pockets left," says Stuart McGregor, head of SSA debt capital markets at RBC Capital Markets in London.

"Corporate issuers had long been seen as a low risk alternative and good diversifier for many accounts, but corporate spreads have tightened dramatically over the last few years, so corporate bonds aren’t so attractive anymore. Some investors could look to A-rated sovereigns for some pick-up. However, many investors, such as bank treasuries and central banks, have more appetite to take on a longer tenor rather than increased credit risk."

To pick up a little yield, central banks have shown themselves willing to move from three years to the five and seven year tenors, and will in some cases buy as long as 10 year debt, according to Bill Northfield, head of SSA origination at Deutsche Bank in London.

But while investors that typically play at the short end, such as central banks, are willing to buy longer dated deals, issuers won’t be able to print as much long debt as they did last year because real money investors — who typically buy 10 years and out — will struggle to hit their yield targets on account of the low rates and the flat yield curves of SSA issuers.

"Last year there were a lot of long-dated deals and in good size," says Achim Linsenmaier, director on the liquid credit syndicate at Deutsche Bank in Frankfurt. "Coupons ranged from 3% to 3.25% and sometimes up to 3.5%. This year rates are so much lower that issuers can’t get near that with a 20 or 30 year deal, without paying up substantially [more than] the 10 year part of the curve. Even moving out further on the curve — like doing a 50 year or 60 year wouldn’t help. Most issuers that were able to raise long dated cash last year are not necessarily in need of repeating the exercise this year."

But despite demand from real money accounts with set yield targets being hurt, public sector issuers won’t be short of investors looking to buy their paper.

Bank treasuries are set to remain an important investor base for public sector borrowers. Post-crisis regulation means that banks have become a captive audience for SSAs: they simply have to buy highly rated liquid product for their liquidity buffers.

"Bank treasuries are becoming a more important investor base for SSA issuers," says Deutsche Bank’s Northfield. "They have become more acquisitive of highly rated euro and dollar paper over the last six to 12 months because of regulatory changes that favour their holding top quality liquid SSA assets. That base should provide sustained support for SSA deals this year."

A key driver of demand in recent years was the liquidity created by the European Central Bank’s three year Long Term Refinancing Operations — many banks recycled this ECB cash into short dated SSA bonds. Now that banks are beginning to pay this cash back, some market participants have been concerned that this LTRO liquidity will drain away from the SSA sector. But those fears appear over-done

"We haven’t seen selling of agency paper because of the early LTRO repayments," says Frank Will, head of supranational and agency strategy at Royal Bank of Scotland in London. "Bank treasuries are hanging on to that. It helps with their liquidity buffers."

Sovereign plus a spread

One sector in the SSA pack set to gain from rates remaining low for a long time is the indirectly guaranteed agencies, which can catch investors’ eyes with a tantalising pick-up over their sovereign.

"We’re content to buy high quality agency paper or covered bonds in an effort to barbell the portfolio, and then look to places like the emerging markets or issuers of a lower credit quality to pick up yield," says Lucette Yvernault, portfolio manager at Schroders in London. "Government backed paper is very attractive, particularly if it offers a nice pick-up over the sovereign."

Some central banks are now willing to look down the credit curve to the extent that they may consider agencies over their sovereigns.

"Even some of the most conservative rates investors are now looking to add implicitly guaranteed agency paper and covered bonds to their buying lists," says Frank Will at RBS. "We met central banks in London who in the past focused mainly on sovereign debt which now have covered bonds approved. They are willing to go down the credit curve to get some spread." 

But covered bonds are not about to take over from sovereigns and agencies as the central banks’ investment of choice, says RBC’s McGregor: "Central banks may be dipping their toe into covered bonds to pick up a little more yield, but compared with what they were putting into covered bonds five years ago, this is not meaningful and won’t be an issue for SSAs."


The great work done by the SSA market in the early weeks of the year, when issuers from all corners of Europe printed successful deal after successful deal, was in danger of being wrecked by a wave of volatility created by an inconclusive Italian general election that left the country in political deadlock. Spanish and Italian bond yields gapped out and market participants feared the worst. But the market did not shut down. Instead, the speed at which it bounced back to health left many in the market scratching their heads.

Just one week after the Italian election, Spain’s yields were back down to pre-election levels and Instituto de Crédito Oficial was able to bring a €1bn five year benchmark.

ICO not only got a deal away, but was able to ratchet pricing in to 33bp over Bonos, 2bp inside the tight end of the initial price guidance.

Issuers such as the European Investment Bank were able to carry on as if nothing had happened — the EIB priced a €4bn benchmark the week after the elections, with Italy still rudderless, and paid a similar premium to what it had been paying before the elections.

And the European Financial Stability Facility priced a deal on the very day the election results came out, albeit only a €3bn deal — on the small side for an EFSF benchmark at the short end.

"We would have expected some volatility to remain visible, when it became clear that the Italian election results were inconclusive," says Linsenmaier at Deutsche Bank. "We therefore were somewhat surprised at how quickly things calmed down only a few days later, with some peripheral issuers coming to market shortly afterwards. It seems that investors are not overly concerned about a few uncertainties overshadowing the market."

The big fear was that without a prime minister and government, Italy would be unable to apply for ECB support in the form of its Outright Monetary Transactions scheme that ECB president Mario Draghi had announced in September last year.

However, the reaction is proof of a more mature euro market compared with last year, where a shock of the magnitude of a €1.9tr economy left without a leader would almost certainly have closed the market down and made it impossible for even the very top rated issuers to syndicate deals.

"Central banks across the globe have made clear that they are willing to pull out all the stops to support risk asset markets," says Georg Grodzki, head of credit research, Legal & General Investment Management in London. "If Italy were to become a big concern and needed to consider EU support, not having a government wouldn’t help. But looking at the pragmatism shown by the ECB and the Eurogroup, I’m confident they could find a way to signal and deliver support for Italy even if it didn’t have a government. Politicians have shown themselves to be flexible at interpreting the rules. Many investors are comfortable with that."

And many investors with shorts on the European periphery last year got burned when spreads screamed in after the OMT was unveiled. No one wants to find themselves in that sort of position again.

"There is a risk that you find yourself on the wrong side of some very powerful bond buyers if you are too focused on the unresolved fundamental problems," says Grodzki.

This all bodes well for SSA issuers, which have returned to a less hurried pace of issuance this year compared with last, when issuance schedules were planned in the knowledge that the market could shut at any time.

A surprising degree of market resilience to Italy’s failed elections does not mean that issuers should not be prepared for some shocks this year, however. The wise issuer shouldn’t take too relaxed an approach to their funding strategy this year.

"One concern is that the market seems to be ignoring the underlying economic problems in the periphery, such as the increase in unemployment in Spain and Italy," says RBS’s Frank Will. "There could be plenty more shocks to the market this year. Protests against austerity measures could begin to destabilise markets. Another could be a downgrade: if Spain were downgraded to junk, for example, that could be a big shock to the system. In the past two years, we’ve had some nasty surprises from the ratings agencies."

  • 26 Mar 2013

European Sovereign Bonds

Rank Lead Manager Amount €m No of issues Share %
  • Last updated
  • 18 Oct 2016
1 Barclays 17,466.08 27 10.19%
2 HSBC 15,533.67 22 9.06%
3 Citi 13,993.72 24 8.16%
4 JPMorgan 13,867.62 25 8.09%
5 Goldman Sachs 12,908.35 21 7.53%

Dollar Denominated SSA (Excl US Agency)

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 JPMorgan 47,915.74 155 11.14%
2 Citi 43,398.84 122 10.09%
3 Bank of America Merrill Lynch 40,272.01 116 9.37%
4 HSBC 36,100.97 93 8.40%
5 Goldman Sachs 30,164.00 67 7.02%

Bookrunners of Euro Denominated SSA (Excl US Agency)

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 18 Oct 2016
1 Barclays 34,193.88 86 8.56%
2 UniCredit 31,679.17 110 7.93%
3 HSBC 29,541.64 106 7.39%
4 JPMorgan 26,804.73 83 6.71%
5 Credit Agricole CIB 26,377.92 74 6.60%

Bookrunners of Global SSA (Excl US Agency)

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 24 Oct 2016
1 JPMorgan 82,573.43 488 7.38%
2 HSBC 79,962.39 308 7.14%
3 Citi 74,258.05 242 6.63%
4 Barclays 72,676.16 233 6.49%
5 Bank of America Merrill Lynch 59,071.27 191 5.28%