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Blame the ECB for Spain's lost orders

By Lewis McLellan
14 Jan 2021

Few deals have ever had €75bn of orders. Spain managed to lose that much, but still have €55bn remaining in the book. This is the world the ECB’s purchase programmes have built.

Vast sums of money chase after almost every euro mandate that hits screens, flooding syndicates with absurd orders, sometimes for 20% of the deal’s projected size. Yes, it’s illegal to inflate orders, but since there’s no way to prove an order is insincere without trying to allocate it and risking the bonds being dumped, there’s nothing to stop the froth.

This demand has little to do with a coherent assessment of the risk profile of a given deal, whether it’s a core eurozone sovereign three year or an ultra long from a country decidedly in the periphery. Why would an investor assess the risk profile when their timeline for holding whatever paper they get is one or two days?

The ECB swallows so much paper that trying to arb it has become a popular and reliable investment strategy.

Spain took a bad call, according to the market. But one can sympathise. If you’d rather place your bonds with investors who intend to hold them beyond the end of the week, pricing tight and ensuring a negative mark-to-market for anyone who punts them is certainly one way of doing it.

Who knows? If the €55bn or so left in the book were quality orders, maybe those allocated will hold on to their bonds, driving them back through the reoffer spread after all.

But while the ECB’s purchasing programmes are live, investors are going to filp whatever they can to them, and the result will be inflated books that obscure, rather than aid, good pricing.

By Lewis McLellan
14 Jan 2021