Eur in no hurry: smaller SSAs should wait for more price markers
The primary euro public sector market kicked off for the year but it's a very different environment from the start of 2017 and 2018. Borrowers will not be supported by net purchases from the European Central Bank, spreads will be pushed up and new issue premiums will go higher — but how much? Borrowers with smaller programmes would do well to wait for more liquid names to gauge the market tone.
The European Financial Stability Facility was the first public sector out of the blocks in the euro market, selling a no-grow €3bn January 2026 with a spread of 1bp over mid-swaps on Monday.
The difference to EFSF’s last seven year benchmark is quite stark. Around the same time last year, EFSF sold a February 2025 — issuing double the volume at €6bn — with a spread of mid-swaps minus 16bp.
Like many other large and liquid SSAs, EFSF’s euro secondary curve widened heavily during the final quarter of last year as investors priced in the end of the ECB’s public sector purchase programme.
EFSF said it paid a modest new issue premium of 3bp for its latest benchmark in what it claimed was “at the tighter range” of concessions seen in the market at the end of last year.
However, some on-looking bankers said the NIP was as much as 5bp.
EFSF’s trade was helped by a number of factors. First, the size was set from the start at ‘no-grow €3bn’ and a spread that would price within a 1bp range.
Second, the supranational has cut its funding programme down from last year, with the issuer looking to raise €22.5bn this year, compared to €28bn in 2018.
Other large borrowers in the SSA market face tougher challenges.
For example, KfW has a €80bn funding programme for 2019, its highest annual level of funding since 2011.
As it followed EFSF into the euro market on Tuesday, KfW’s secondary curve — already under pressure from the start of the year — widened by about 2bp between the announcement of its new 10 year euro benchmark and guidance.
In the end, the €5bn trade was priced with a spread of mid-swaps minus 7bp, only 1bp tighter than the initial pricing level and significantly wider than KfW’s last 10 year benchmark in September, which was priced with a spread of minus 14bp, although that trade being sold for a smaller size of €4bn.
With spreads higher and the widening pressure continuing — bankers expect the repricing is not over — this will be particularly tough for the smaller issuers, where finding a level in a less liquid curve is harder still.
Public sector borrowers with smaller funding programmes would do well to wait for more of the larger issuers to come to the market across more maturities to get a better idea of the market environment. If they need to pay up, it's as well to know how much.