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SSAs should take a place in the queue before ECB dislocation

The SSA issuers which came ahead of the ECB meeting on Thursday were wise to fund early. The Eurosystem will be a big buyer, but will dislocate the market.

A few sovereign, supranational and agency issuers have braved the markets this week ahead of Thursday's European Central Bank governing council meeting, where further details on how Mario Draghi will use his quantitative easing bazooka should be unveiled. They might have given up a couple of basis points, but will have gained peace of mind.

As Europe’s central bankers prepare to buy up billions of euros of SSA paper, many funding officials could be forgiven for getting hot under the collar at the prospect of their funding levels tightening further.

But it won’t all be plain sailing. For one thing, most market participants are still scratching their heads as to how the ECB is going to manage to buy the volumes it needs in a market with limited supply. If Draghi and co don’t offer enough detail on their plan of action on Thursday, then that could get market participants even more worried about what is coming up — something which isn’t going to improve primary issuance conditions in euros.

On top of that the potential for dislocation as the ECB begins buying is large. As the central bank hoovers up secondary market paper, spreads are going to go haywire, making it hard for issuers to find the right level for a smooth primary syndication.

And enticing investors at enviable levels is certainly possible this week — on Tuesday, Finland sold a €3bn April 2031 at 15bp through mid-swaps and at a yield of just 0.844%.

Those that venture out this week may lose out on a couple of basis points of further tightening after the ECB’s announcement, but they will have the luxury of sitting on their hands while investors get used to QE, and can return to print again when markets regain a degree of serenity.

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