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Two-faced dollar market roars in US, quails in Asia

This week's explosive start to dollar bond business in 2004 could not disguise the fact that the market bore a sharply different colour on either side of the Atlantic - and the Pacific.

In the US, investors had no choice but to plunge into the market in search of yield. They devoured $17.6bn of high grade supply and gave the impression that it had merely whetted their appetite for the $30bn-$40bn of further supply expected in January.

Investment banks Goldman Sachs, Credit Suisse First Boston and Morgan Stanley issued a collective $8.5bn of their own funding within hours of each other.

Even Toys ‘R' Us bonds tightened, though the US toy retailer cut its earnings outlook and was downgraded to junk by Standard & Poor's.

But in Europe and Asia, investors who could choose between dollars and euros were much less confident. Alarmed by the dollar's slide in the currency markets and jittery about the direction of rates, they hung back from the market or played safe at the short end.

The radically different fortunes of this week's benchmark European issues illustrate how investor demand outside North America fell away for maturities above five years.

The Republic of Italy's $2bn three year tap was the success of the week among globally distributed deals. Yet at five years, the European Investment Bank's $3bn five year benchmark was not fully placed at pricing.

And a seven year deal for German agency Rentenbank and a 10 year for the Council of Europe were judged by market participants as hardly having been placed.

One explanation is less interest from Asian central banks in dollar securities. "We are definitely seeing less focus on dollar trades from Asia this year," said a syndicate official. "Ticket sizes are smaller and demand is less frequent, which is in direct contrast to the euro, where ticket sizes have grown and we are seeing much more interest."

The book for the Republic of Italy's $2bn tap of its $3bn December 2006 issue reached $2.5bn within 24 hours although Deutsche Bank, Goldman Sachs and Merrill Lynch gave the market no warning of its launch.

"I told the leads to close the books because we were already oversubscribed even before official launch," said Domenico Nardelli, head of derivatives and international funding at the Italian Treasury in Rome.

The issue's distribution proved its global appeal — some 40% sold to Asia, 30% to the US and 30% to Europe and the Middle East.

Ralph Berlowitz, head of frequent borrower syndicate at Deutsche Bank in London, described the order book as being the kind that other borrowers just dream of. "We were delighted," he said. "It is always questionable whether taps work — especially at the beginning of the year — but it was clear that the short end of the dollar market is well bid. I do not think a new deal would have attracted more demand."

BNG also chose the three year maturity for its $1.5bn Eurodollar transaction and, although ABN Amro, Barclays Capital and BNP Paribas had not fully placed it at pricing, the issue was recognised as one of the more successful dollar trades this week.

"It was the right trade for the market, being a short dated, defensive bond for an impeccable credit," said one co-lead. "People are nervous about the dollar and don't want beyond three years."

The EIB's $3bn March 2009 global bond was widely judged too ambitious in size and too tight in pricing at Libor minus 22bp-24bp. Several banks had advised the borrower to issue $2bn but its determination to sell benchmark transactions of $3bn prevailed.

"We had not been in the dollar benchmark market since June 2003, but had been monitoring it," said Eila Krevi, head of funding, America, Asia and Pacific at the EIB in Luxembourg. "Five years seemed to be the right choice and we decided to proceed with a slightly long five year."

The deal was priced at 22bp over Treasuries, which equated to the low 20s through swaps — a concession of some 4bp over the trading level of the EIB's June 2008s.

Citigroup, Goldman Sachs and UBS sold the issue 39% into non-Japan Asia and 14% into Japan. But particularly impressive was the 25% placed in the US, as the deal was priced about 20bp inside US agencies.

"The EIB has established an investor base in dollars like no other issuer in the market," said Chris Lees, head of frequent borrower syndicate at Citigroup in London.

CSFB and RBC brought a $500m seven year trade to market for triple-A rated Rentenbank at 88bp over Treasuries, but it is not expected to clear until at least the payment date.

But arguably the most difficult dollar deal of the week was the Council of Europe's $1bn 10 year. Dresdner Kleinwort Wasserstein and JP Morgan won it via competitive bidding but at 20bp over Treasuries — about 2bp through the borrower's outstanding curve — most of the paper was thought to be held by the lead managers.

"The 10 year sector has been difficult for the last three to six months," said one syndicate head. "There may have been a little Asian demand but it will have been nigh on impossible to sell bonds anywhere else. The spread will have to widen before this sells."

Another banker described the issue as an expensive piece of paper in a maturity investors are just not buying.

The next benchmark in the calendar is KfW's fourth dollar global bond. The German development bank had been expected to launch a new five year but market participants wonder if the EIB's sluggish execution will direct KfW to the more appealing three year sector.

JP Morgan, Lehman Brothers and Morgan Stanley will choose the maturity today (Friday) and launch the $3bn issue next week.

Also today, Freddie Mac will announce its funding plans for the quarter. The agency has $17bn of  redemptions to contend with in January, but expects to issue more dollar and euro Reference Notes, syndicated callables and FRNs.

January may well turn out to be the agencies' busiest month ever by volume. 


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