Investors' capital builds up over the year end holidays and top rated issuers are eager to start their funding for the year before anything can disrupt the market.
This year, a partial US holiday on Tuesday in honour of the late President Gerald Ford, combined with a Japanese holiday and US non-farm payroll employment data due out today (Friday), kept most issuers at bay. Only Germany's Landwirtschaftliche Rentenbank nimbly took advantage of a deal-free week to execute a $1bn seven year Eurodollar bond.
Next week, there will be fireworks. Bankers' and investors' eyes are trained on the 10 year dollar market, where there could be a crush of deals that will test that sector's new-found depth, discovered in 2006.
The question on banker's lips is whether the European Investment Bank and KfW Bankengruppe, the German development bank, will go head to head next week with 10 year dollar globals.
Since the dollar yield curve is flat, borrowers are keen to issue long and lock in attractive rates — and there is strong investor demand for duration, since buyers expect rates to fall.
Though US investors have almost bottomless pockets for 10 year deals from the domestic mortgage agencies, the audience for the more expensive 10 year bonds of European supranational, sovereign and agency issuers is much narrower.
Such deals rely on Asian and European demand, and two big deals would stretch that — especially as Freddie Mac will take $3bn out of the market with its new 10 year Reference Note, which it will announce on Wednesday. Fannie Mae will reveal its January benchmark issuing plans on Monday.
KfW took the unusual, some say risky, step of announcing a mandate for its $2bn 10 year deal before Friday's payroll data. But, provided the number is benign for the bond market, lead managers JP Morgan, Merrill Lynch and UBS will open the books when the Asian day begins on Monday.
Pricing is expected to be in the Libor less 16bp area, in line with KfW's curve. The EIB trades at around 18bp through Libor in 10 years.
While the EIB was said to be pondering a 10 year deal, some bankers believe that would be dangerous. Some of the EIB's advisers are recommending the safe option of a three year maturity. The supranational is expected to make a decision after the non-farm payroll announcement.
The Council of Europe was also mentioned as a 10 year contender. Talk is also circulating of a new global bond, possibly at 10 years, by the Republic of Italy, which has been out of the market since September 2006 when it enjoyed a blowout success with a $3bn 10 year.
Encouragingly for next week's issuers, Rentenbank's $1bn seven year transaction was an undoubted success. It was Rentenbank's first issue as a zero risk-weighted borrower under Basel II, which was implemented on 1 January.
As the bond was subscribed in less than a day and over three-quarters of it was bought by central banks, it is clear that the borrower and lead managers Morgan Stanley and RBC Capital Markets called the market just right.
With sovereign, supranational and agency issuance at a low ebb in the last six weeks of 2006, investors had built up cash reserves and the deal's success confirmed investors' interest in duration.
But the market backdrop is already becoming uneasy. Treasury yields fell 5bp-6bp yesterday (Thursday), ahead of the non-farm payroll numbers. Many expect them to be softer than forecast, suggesting weaker economic performance and hence more chance of a rate cut.
Four sovereigns in euros
The euro SSA sector will open early next week, with Austria and Greece issuing syndicated government bonds. Austria will launch its first 30 year bond, to be led by Barclays Capital, Credit Suisse, Goldman Sachs and Morgan Stanley with a size of at least Eu3bn.
Greece will sell a 10 year, expected to be worth Eu5bn, via Citigroup, Emporiki Bank, JP Morgan, Piraeus Bank and UniCredit.
Poland is also scheduled for next week, with a Eu1bn-plus transaction, lead managed by Deutsche Bank, Société Générale and UBS. Poland held roadshows at the end of December with a view to an early January launch. The consensus among bankers is that the republic will opt for a 15 year maturity.
Belgium, meanwhile, is poised to award a mandate for a new euro benchmark bond, set for launch in the week of January 15.
Jo Richards
