Guarantor: Federal Republic of Germany
Amount: $5bn global
Maturity: 20 September, 2024
Issue/reoffer price: 99.937
Spread at reoffer: mid-swaps minus 3bp; 12.5bp over the June 2024 US Treasury
Launched: Wednesday, July 7
Payment date: July 14
Joint books: JP Morgan, Nomura, RBC Capital Markets
It has been rather quiet in the dollar market for the past four weeks, which is unusual in the SSA market. We felt that we could take advantage of that lack of supply by coming to the market now.
US Treasury spreads have widened a little and there’s a huge amount of liquidity to be invested, particularly in the North American and financial institution investor base. We knew there would be good demand from those investors, and it’s reflected in the distribution statistics. We also had good participation from central banks, compared with the three year we sold in February. The yield we are offering is 20bp higher than it was in February, so although some central banks are still on the sidelines, they were fairly well represented in the book.
From a strategic perspective, we are comparing funding conditions to the euro market. Three years is clearly more attractive for us in dollars because of the wider swap spread. That means we can offer a double digit spread to US Treasuries and come fairly close to fair value. We priced the trade at mid-swaps minus 3bp, with fair value around minus 4bp to minus 5bp. It’s trading a little tighter today at minus 4bp.
We discussed why the market had been quiet with banks. The views we received were that half year was approaching and that restricts some issuers and that, for euro-based funders, dollars was not especially appealing, but the demand side was always there.
There has been some volatility in the market this week. For us, the key metric is the development of the swap spread, and that was favourable this week, so we were able to go ahead without much concern. However, the discussion around inflation is not going away. How central banks approach the question of inflation will likely affect the maturities we issue in. We like to issue at the long end of the dollar market, but that may not make sense. In euros, rates have come down despite discussion about inflation. It’s possible some interpretations of how the ECB will react have been exaggerated. It’s our job to monitor the market and decide how best to navigate it.
It was an absolute flier. There has obviously been a serious dearth of supply for the past four weeks or so, so when something came around that investors wanted, they jumped at the chance. It’s rare to see a book of $12bn for a single tranche dollar deal.
The backdrop has been volatile. We started the week with 10 year rates at 1.52% and we have been down to 1.26% this week. Fortunately, despite the volatility, swap spreads remained well anchored.
In a volatile rate environment like this, what investors want are short end, high quality trades, so this really got an incredible response.
The response from US investors was particularly gratifying.
Price discovery wasn’t really a concern because we had the ADB three year. It has done well in the secondary market, so we weren’t going to price flat to that, but looking at KfW’s curve, we saw fair value around minus 3.5bp to minus 4bp.
Distribution by investor type
Central banks and official institutions 38%
Asset manager 12%
“…very impressive outing for KfW, and it will likely encourage others to follow.”
“…they tightened the price by 2bp and priced in line with ADB and CEB to come with a single digit spread to US Treasuries, which kind of feels like the norm these days. It was a relatively smooth exercise.”
“…the dollar SSA market has been undersupplied for quite a few weeks. If you look at curve structure now, the curve has flattened again, which means the long end is less attractive versus the short end. Also, swap spreads are at their widest in the three year part of the curve. So that’s what is driving the three year supply at the moment.”