The European Stability Mechanism has charged investors a yield of 7bp for the privilege of lending it €3bn until October 2017. This new world raises new possibilities about what issuers could — and should — achieve.
This was far from a deal that scraped over the line. Orders topped €9bn and, at least according to the leads, there was little price sensitivity in the journey from initial price thoughts of minus 4bp area down to the final yield.
The bumper demand may not just be down to investors having gone mad, of course. Some might be hoping to buy now and sell later to the European Central Bank at a higher price in secondaries. Others, like bank treasuries, might need the paper for their liquidity coverage ratios.
But what is certain is that minus 20bp — the lowest yield at which the ECB will buy bonds under its public sector purchase programme — is fast becoming the new zero.
When ECB president Mario Draghi laid his floor, the euro curve quickly flattened, pulling down yields in longer tenors. It makes one wonder how euro denominated pension funds can possibly hope to hit the targets they need to meet their future liabilities.
“May you live in interesting times” is allegedly a traditional Chinese curse, although the saying is thought to be apocryphal. “May you live in interest-free times” looks increasingly likely to be an altogether true curse in the eurozone as today’s workforce approach their retirement.
But there is one way of offering at least some respite for pension fund managers and the increasingly worn out minus buttons on their keyboards — and happily, it could also help the funding officials at their countries’ sovereign debt offices.
Such low yields across the curve opens up the possibility for sovereign issuers to push beyond the traditional 30 year benchmark limit into 40 and 50 year syndications. Countries like Italy have already done that via private placements, while the UK Debt Management Office has gone beyond 30 years in sterling.
Bringing such a new type of deal for the single currency would not be easy and would require a lot of groundwork. But it would certainly not be impossible.
Eurozone periphery sovereigns could really repair some of the damage done to the average life of their debt during the height of the currency bloc’s debt crisis with such ultra long paper.
They would be doing their hardworking pension fund managers a big favour too. And, if we can be mischievous for a moment, giving those managers a healthy dose of yield might well avoid any future bail-outs for pension funds on the brink of collapse.
Nobody wants to see the term “too big to fail” raised again, and certainly not in the context of pension funds. For the good of their taxpayers, sovereigns should immediately adopt a policy of “nothing too long to try”.