Increased funding needs for Europe’s trouble shooting twins — the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM) — would once have worried SSA investors. But nowadays they will be overjoyed at the prospect of more issuance from borrowers paying a healthy premium over the meagre sovereign yields that appear to be grinding ever lower.
Earlier this year there was concern about how the ESM would fit into the EFSF’s issuance schedule without causing indigestion or overcrowding. But looking at the EFSF’s recent appearances in the market and the appetite for high quality credits offering even the slimmest of spreads, these issuers could come once a week for the rest of the year and investors would keep calling for more.
The ESM is set to raise up to €12bn of cash through two or three benchmarks in the second half of this year, it revealed this week.
This will finance the impending bail-out of Cyprus, as well as the rollover of €9bn of bills inherited from the EFSF’s support of the Spanish banking system.
Coupled with a €58bn funding target for the EFSF, a borrower barely three years old, this might previously have caused investors to fear oversupply.
The EFSF is not famed for picking the best moments to issue, and so far this year it has visited the markets once a fortnight, with varying success.
But after the Bank of Japan and European Central Bank led investors to conclude that rates are set to stay even lower for even longer than anticipated, the EFSF and ESM have begun to even more attractive, especially as one of the sovereigns benefitting most from the BoJ’s quantitative easing move is France — long considered a key pricing benchmark for the EFSF.
Its ballooning spread to France helped explain the €14bn book on the EFSF’s (and the agency world’s) biggest bond ever — the €8bn five year sold on April 9.
Just this week the EFSF tapped seven year debt, a maturity where central banks are only occasionally tempted to play, to the tune of €2bn, achieving its second highest ever distribution to central banks and official institutions of 49%. The tap paid a tasty 20bp plus spread over OATs.
When central banks, highly conservative investors, are willing to push out to seven years in size to pick up spread, it shows that they are comfortable with the risk. The EFSF and ESM could well be about to join the core of established, go-to issuers that can ride out any storm in the credit markets.
