Between Monday morning and Tuesday lunchtime some 200 accounts from 22 countries placed over Eu19bn of orders for the bonds, lead managed by Barclays Capital, BNP Paribas, Deutsche Bank and HSBC.
The remarkable strength of demand surprised even the deal's backers and allowed it to be priced at just 3bp over the 2035 OAT.
The bond is the longest dated large government bond from a major issuer in recent decades. The People's Republic of China and the Philippines' central bank both issued 100 year bonds in 1996 and 1997, but they were only for $100m each.
Apart from those, Dealogic's Bondware database, which goes back to 1980, only records a Sfr189m 50 year issue by the Swiss Confederation in 1998, which was placed by auction with a coupon of 4%.
France's Eu6bn deal this week makes those issues seem like mere experiments. Its launch extends the far end of the euro government bond market beyond those of sterling and dollars, but creates a fixed income asset that sits well with the liabilities of many institutional investors.
"A banner transaction," said one syndicate member. "It expands the boundaries of the euro market and highlights the huge bid that exists for duration. Not too many months ago 30 years was a push, but the dynamics have changed dramatically."
Before the transaction a survey of 400 investors by AFT and the leads had revealed asset and liability matching as well as regulatory changes as the main structural factors stimulating long dated demand.
But while interest in a 50 year from 49% of the canvassed investors gave momentum to the transaction and resulted in AFT moving quickly to launch, few market participants anticipated just how successful the issue would prove.
Because of the novelty of the maturity, wide spread guidance of 3bp-7bp over the 2035 OAT had been given, but AFT was able to achieve the tight end and price its deal at a spread inside what was suggested by the 30-50 year swap curve.
"The quality and size of the order book showed very clearly that we could price the transaction at 3bp, whereas 4bp would have been counter-productive," said Geert Vinken, global head of syndicate at Barclays Capital in London.
Out of the Eu19bn book, Eu15bn of orders held at 3bp.
The bond was allocated UK 22%, Italy 16%, Germany 13%, France 12%, Switzerland 9%, Benelux 7%, other euro zone 8%, 4% to non-euro Scandinavia, 7% to North America, 1% to Asia including Japan, and 1% elsewhere.
Fund managers took 45% of the bonds, insurance companies 14%, pension funds 8%, banks 13%, central banks 1%, other investors 1% and hedge funds 18%.
Pensions bid modest
Several market participants — both bankers and investors — were surprised that the figures for pension funds and insurance companies were not higher, since such accounts were widely touted as being the greatest beneficiaries of the new instrument.
Dutch participation was also considered low, included in the Benelux's 7%, given the size of the country's private pension industry — the largest in the euro zone — and the regulatory changes under way there.
However, officials at the leads said that some pension and insurance accounts had been included in the fund managers category if they were part of a financial group that included a fund manager, and that their true participation was higher than it appeared from the raw data.
"What you really need to focus on is the percentage that went to real money accounts," said Ralph Berlowitz, head of liquid credit syndicate at Deutsche Bank in Frankfurt. "The figure of some 70% that was achieved is clearly extremely high for an inaugural 50 year bond and achieved one of France's main goals."
Furthermore, AFT had been keen to include relative value investors such as hedge funds and some other fund managers to ensure the deal's liquidity. Many relative value players are betting on a growing bid from pension funds and insurance companies pushing the curve flatter.
"You need to have trading accounts in such a transaction to ensure a liquid market," said Armin Peter, public sector syndicate official at HSBC in London. "If allocation had been 100% to buy-and-hold accounts then the deal wouldn't have met the liquidity requirements that investors had indicated in the survey."
Benoît Coeuré, deputy CFO of AFT, also told EuroWeek that it was important to remember that relative value players were able to react more quickly to such a novel instrument.
"This is a process that we have already witnessed in the inflation linked market," he said. "At the beginning, the participation of pension funds in that product was perhaps at the lower end of our expectations, even if it appeared to have been almost tailor-made to meet their requirements. But over time their participation in the product has increased gradually and they are now important players."
A new liquid market
The diversity of investors in the OAT was also seen as a strong vote of confidence in the maturity.
"We had a very broad cross-section of investors participating in the trade and that shows that 50 years is not just a niche market, but will be a liquid benchmark maturity going forward," said Rob Whichello, head of frequent borrower syndicate at BNP Paribas in London.
Italy is widely considered the most likely euro zone sovereign to follow France's lead, while the UK's Debt Management Office is already discussing a possible 50 year Gilt.
Investors are, however, hoping that issuance from other governments will be orderly.
"We have seen everyone rushing to the long end this month and last, and have had much more supply than we were expecting," said one fund manager. "I know this is meant to be to meet demand, but I am afraid there will be oversupply and yields will be pushed higher."
Another pleaded for some coordination between sovereign issuers. "Now that France has made the jump to 50 years, it would be nice to see someone launch a 40 year," said the investor. "But with the competition there appears to be between the finance agencies I am not very optimistic."
As well as delivering a unique investment opportunity, AFT also profited from the historically low yields prevailing, with a coupon of 4%.
AFT has in the past been the most active government participant in the swap market, using it to manage duration. This has enabled the agency to decouple its decisions regarding duration from those relating to primary issuance, said Coeuré.
However, AFT suspended its use of long term swaps in 2002 for several reasons.
"One of these," said Coeuré, "is that long term rates are outside historical boundaries and, given the low level of rates, we do not have any problem with being locked into long dated rates. If and when rates do come back within these historical boundaries, however, we will resume our swaps operations."
