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In praise of unintended consequences

The 10 year Bund yield came within a whisker of negative territory this week. While that may be seen as the complete breakdown of everything you ever thought you knew about bonds, for one closely related branch of issuers it represents a golden age.

Despite their obvious links to the safest of eurozone sovereigns, German Länder deals are not always spectacular successes. In fact, they are sometimes more hund than Bund.

But the State of Hessen’s €1.125bn 10 year this week — increased in size from the initial €1bn target, pricing at the tight end of guidance and coming a week after an underwhelming 10 year from Council of Europe Development Bank — was the latest in a long line of Länder deals to win lavish praise.

Several experienced SSA bankers say they cannot remember a run like this for the asset class.

The explanation in simple. German bank treasuries need to buy assets for their liquidity coverage ratios. The Länder qualify for LCR. And with Bund yields where they are, it is clear that the German government will lose out if banks have the option of picking which assets they will use to meet their regulatory requirements.

So a tricky asset class has become as close to a dead cert top trade as it is possible to be — thanks to regulation and what some believe to be the ECB’s monetary experiment in madness.

Which just goes to show — not all unintended consequences have to be bad.

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