Dollar bond investors around the world have been eager to pick up duration as they expect the next interest rate move to be downwards. But appetite only strengthened this week when stronger than expected producer price inflation, housing data and a drop in jobless claims put all thoughts of a rate cut in the first half of 2007 out of most market participants' heads.
Treasuries softened and the 10 year yield flirted with 4.8%, enticing even more buyers into the market. With little in the way of market-disturbing data next week, bankers reckon dollar issuance could be frenzied.
The only certainty yesterday (Thursday), however, was Landwirtschaftliche Rentenbank, which is set to launch a $1bn-plus 10 year global bond on Monday through BNP Paribas, Goldman Sachs and UBS.
The Nordic Investment Bank is another likely 10 year dollar candidate. Bank Nederlandse Gemeenten, however, which had been rumoured in 10 years, is believed to be considering shorter options.
This week, however, was shortened in the US by Martin Luther King Day, and the big action was in euros.
The ZEW survey on Tuesday showing a marked improvement in business confidence in Germany helped to keep European government bond yields firm this week, and Belgium scored a massive success, garnering a book of over Eu16bn for its Eu5bn syndicated OLO.
Lead managers ABN Amro, Deutsche Bank, HSBC and KBC priced the 10 year bond with a 4% coupon at the tight end of spread guidance — 6bp over the 3.75% January 2017 Bund.
Nederlandse Waterschapsbank also achieved an oversubscribed book for its Eu1bn 10 year deal, led by ABN Amro, Barclays Capital and Credit Suisse.
Next week the Republic of Hungaryis slated to issue a long 2017 euro benchmark with BNP Paribas, Dresdner Kleinwort and ING at the helm. And KfW is expected to award a mandate today (Friday) for a Eu3bn-Eu5bn 10 year, also to be launched next week.
Caution pays for Belgium
Belgium's cautious approach to the market delivered it the impressive result it wanted. The Aa1/AA+ rated kingdom offered investors a wide spread range of 6bp-8bp over Bunds.
The tactic worked, and in less than 24 hours the four leads had got the book more than three times subscribed, with few inflated orders.
Anne Leclerq, head of the Belgian Debt Agency's front office in Brussels, told EuroWeek that, because of volatile market conditions after a period of rising interest rates, it was necessary to offer price guidance that had the most potential to attract investors.
"This we felt would be achieved at Bunds plus 6bp-8bp," she said. "It was essential to get momentum behind the transaction and attract not only leveraged accounts but real money accounts as well. However, we hoped from the beginning that the market would allow us to price at plus 6bp, which is in line with where our 2016 issue was trading in asset swap terms, so really reflected fair value."
With the book growing fatter by the minute, ABN, Credit Suisse, HSBC and KBC quickly refined guidance to 6bp-7bp and then 6bp area, finally pricing on Tuesday at the hoped-for 6bp.
Some market participants considered this cheap. "While the asset swap level was quite rich, Belgium traded through Bunds last summer and cheapened during the second half of the year," said one head of public sector debt capital markets in London. "Therefore, for value buyers who looked at the issue over a period of time, it was a cheap deal."
This view was countered by Ralph Berlowitz, head of frequent borrower syndicate at Deutsche in Frankfurt. "The new 10 year Belgium was priced at minus 17.4bp on an asset swap basis, when the 2016s were trading at minus 17.2bp. The Kingdom of Spain 10 year was at minus 17.5bp and it is a pure triple-A. As Belgium came flat to Spain and slightly through its outstanding transaction, it is hard to say the pricing is cheap."
The Eu16bn book contained orders at the wider levels, but over Eu9bn held firm at 6bp over, leaving many unsatisfied customers looking for paper. Buying by such accounts quickly tightened the bid to Bunds plus 5.5bp in the secondary market. Placement was largely concentrated in Europe, with UK buyers taking 21%, Belgium 20% and France 18%.
The magic number
Paul White, global head of syndicate at ABN Amro in London, said the overall book contained a large component of leveraged investors, including hedge funds, banks and proprietary trading desks.
"However, final allocation was skewed towards real money," he said. "Final distribution was fund managers 25%, bank ALMs [asset and liability managers] 28.5%, central banks 10.5% and insurance companies 5%."
Leclerq gave three main reasons why the deal was such a blowout. "One is the fact that rates are over 4%," she said. "This is something we haven't seen for a long time and 4% seems to be a magical number for investors. Also, some market players are expecting swap spreads to widen and in that area we are well placed because Belgium is viewed as a strong credit, which could follow any widening when it happens.
"In addition, the 10 year area is not the richest part of the curve so there is even more potential for performance. As well, Belgium has built a reputation of taking care that its deals perform in the secondary market."
White acknowledged that investor interest in 10 year assets was likely to continue while rates remained over 4%. But he sounded a note of caution by stressing that sovereign issuers faced challenges because of their performance against swaps and the volume of attractively priced competing deals.
"Investors can buy covered bonds, for example, and pick up 20bp-25bp," he said, "or double-A financials for a pick-up of 40bp-50bp."
Ned Waters impresses again
Though it grabbed smaller headlines than Belgium, Nederlandse Waterschapsbank's Eu1bn 10 year benchmark achieved swift execution and attracted a stellar book of real money accounts.
The Dutch public sector finance agency also improved on its 10 year funding levels. A year ago, it paid mid-swaps plus 3bp for a 10 year issue. The new bond was priced at less 1bp, the tight end of guidance.
Ed Mizuhara, head of frequent borrower syndicate at Credit Suisse in London, described the quality of the book as incredibly high.
"Almost 90% of the issue was sold to real money and a huge part of it was cash," he said. "The central bank component, both Asian and European, accounted for 34%, fund managers 32%, insurance companies 15% and pension funds 6%.
"An interesting aspect of the distribution was the strong participation by French and Asian accounts, which bought 40% and 33% respectively. This is unusual for a transaction like this, especially the Asian involvement."
Nederlandse Waterschapsbank expects to borrow between Eu7bn and Eu8bn this year, compared with Eu6.5bn in 2006. The figure is expected to grow by a further Eu1.5bn in 2008.
Tom Meuwissen, general manager, treasury at NWB in the Hague, said the deal had got its funding programme off to a flying start.
"With this transaction and our last five year euro benchmark, I believe we are establishing a nice trend for future issuance," he said. "With an increased funding target, we could possibly issue three benchmarks this year rather than the usual two.
"Our next benchmark could be in the dollar market. We did not issue a proper benchmark in dollars last year and this is something we would like to do. It will be either a three or five year."
Jo Richards
