SSA issuers are finding that they have to be quicker off the mark than ever before in terms of bringing their deals to market thanks to increased volatility in the global capital markets.
|In the Merrill Lynch Sovereigns, Supranationals and Agencies Roundtable the following panellists discussed the trends that have been driving the market this year and the lessons that they have learned:|
Benoît Cœuré, deputy chief executive officer of Agence France Trésor in Paris
Nick Dent, head of frequent borrower syndicate at Merrill Lynch in London
Michael Gower, head of funding at Rabobank in Utrecht
Eila Kreivi, head of funding for America and Asia Pacific at the European Investment Bank in Luxembourg
Stuart McGregor, co-head of the Europe, Middle East and Africa public sector debt capital markets group at Merrill Lynch in London
Aldo Romani, managerial adviser and deputy head of funding, euros, at the European Investment Bank in Luxembourg
Horst Seissinger, head of capital markets at KfW in Frankfurt
Neil Day, contributing editor, EuroWeek, and roundtable moderator
EuroWeek: What are the main trends that you have observed in the sovereign, supranational and agency market this year and how have these related to your issuance strategies and goals?
Seissinger: Our strategy is defined by the volume that we want to issue every year and at the beginning of the year we communicate to the market what we intend to issue. Within this, the market is very interested in getting a good feeling for the benchmarks that we plan to offer.
The general trend with respect to benchmarks from our point of view is that while there is strong demand for liquid product at the longer end in euros and at the same time demand for liquid product in the dollar market as well, it seems that timing is of the essence.
If we look at the lead time we took for the preparation of our benchmarks, in the past it was a few days. If we talk about issuing a dollar benchmark today, it is a decision and execution made in a matter of hours. This demonstrates that there is an increased need for issuers to react flexibly to investor demand, to move faster with respect to the decision-making process, and in general to listen very closely to the market.
Gower: Timing has always been important for us, particularly given that we are a triple-A bank and therefore slightly unusual in the triple-A space — we are not an agency or a supranational or an official institution. Certainly this year even more than most, and especially at the longer end, we have had to be much more flexible and much quicker off the mark in terms of timing.
That being said, when we have been able to react quickly to investor demand, we have felt that the reception has been pretty good. However, this is a trend that has certainly been evident since the beginning of this year, and it looks like it is here to stay.
EuroWeek: The EIB's 10 year dollar transaction appeared to be particularly well timed. Was going ahead with that deal a decision that you had to make quickly?
Kreivi: Absolutely. Timing is important in any deal when you are talking about benchmarks, and the further you go along the curve the more important it becomes, because demand for such product is very much yield sensitive. You therefore have to capture absolutely the right moment, and I think that was very well demonstrated with the 10 year.
An additional trend that we have seen in sovereign, supra and agency issuance this year has been the increased interest and issuance activity in non-core currencies. They have certainly played a larger role in our funding.
Seissinger: It is much more important for issuers today to offer investors the whole range of products, which means you have to offer products not only in benchmarks, but in the whole range of currencies that are of importance for investors. Issuers have to offer at the same time liquid products as well as structured products.
McGregor: The story of duration has really become a global story this year. That was a trend a lot of people expected to happen this year, with the reintroduction of the 30 year Treasury and the fact that pension reforms are happening in the US, Canada, and even to some extent in Japan. It is not just a Dutch story or a UK story, which Europeans have been focusing on for the last couple of years.
Even though timing is important, as discussed, we have seen some bigger trends that certainly in the SSA space have allowed for changes to issuance this year and which will present new opportunities going forward.
One is the longer end issuance we have been seeing, in particular the return of longer dated dollar issuance, but we have seen a change in issuance in the yen market as well. In August, for example, we were fortunate to get the opportunity to launch a ¥75bn five year global floating rate note for KfW. That underlined the changing trends in the global economic cycle and also the way that investors are looking at cash.
So even though getting the timing right when you are actually pushing the button may be harder, you can take a step back and see overall trends that are emerging and look three to six months ahead at possible developments in the true liquidity markets.
EuroWeek: Looking more closely at the long end, to what extent have the structural shifts that have been widely discussed come through?
Cœuré: Returning for a moment to the previous discussion, I totally agree with what has been said on the value of having a wide range of products at your disposal and being able to adapt to changing investor demand.
That said, I would like to add that the challenge is not only to offer a range of products, but also to identify correctly what is happening on the demand side. If you are a large issuer it is all the more important to identify correctly long term trends and not to be disturbed too much by the buzz or the hype around presumed trends in the market.
An example of this can be found in the talk about very long term issuance. We have lots of comments about pension funds buying ultra-long dated assets and about the future of the bond market being at the long end of the curve, and so on and so forth.
This move has been slower than expected, and from a sovereign issuer standpoint you also have to provide bonds around the 10 year bracket, which remains the benchmark of the market, whether we like it or not. It remains the most important point along the curve. And we also have to continue providing T-bills and short term products to central banks and money market investors.
So there is certainly a limit to the extent to which we can diversify into the long end. There is such a wide range of client interest and we cannot focus too much on one particular market segment just because it is fashionable.
Regarding our experience, we have been pleased by the way it has developed at the very long end of the curve. We have been able to issue more than Eu11bn of the OAT 2055, which is certainly way beyond the expectations we had before we launched the product. We have also been lucky enough to issue it at a good rate, which is even better for the French taxpayer.
That said, I wouldn't say the market for 50 year bonds is as liquid and as animated as the market for 30 year or 15 year bonds. It is still a very specific market and the way demand materialises is very lumpy. You can have quite long periods without demand at all, and then you have big tickets initiated by perhaps liability-driven investors. Overall it is still concentrated around big order flows and it is not yet completely integrated with the rest of the curve.
EuroWeek: Does that make it difficult to time supply correctly?
Cœuré: We have certainly retained more flexibility in our issuance policy for the 50 year. We have committed to continue to issue it, but we have not committed to specific dates. We keep very closely in touch with the dealers to be able to include the 50 year bond in any auction depending on how demand develops, but we have to be relatively flexible in this respect.
On this particular product I totally concur with what has been said. You have to be prepared to issue into demand when it materialises, which is not the case for, let's say, benchmark 10 year bonds, which we issue on a routine basis every month.
EuroWeek: KfW launched its longest deal earlier this year. It is not a competition, but you have not gone out as far along the curve as the EIB or AFT, for example. Were you more sceptical about the evolution of demand at the long end, or is it just a question of not having the same sort of needs from an asset-liability management standpoint?
Seissinger: It is a not a question of whether or not we have confidence in the market at the longer end. That is a subject where we share the view of Benoît — we do expect this trend to continue.
The major question for KfW is of course the point you raised, whether or not we need it for our asset side, and there we are of course different from a sovereign. The average duration we have on our asset side is much shorter than 15 or 30 years, so we just don't need this duration.
But at the same time we do believe that as a benchmark issuer, as a quasi-sovereign, you don't necessarily have a choice. We decided to go ahead with a maturity of 15 years because we considered it necessary to extend our yield curve, and that is in line with what I said at the beginning: it is essential today for a large issuer to offer to customers the whole range of products, and this was the main reason why we issued the 15 year benchmark, and the transaction has shown that obviously there was a strong demand for it.
EuroWeek: When the EIB launched its 30 year there were some people who pointed out that it hadn't done a 10 year for quite some time. Is it difficult trying to strike the right balance in having sufficient benchmarks in each part of the yield curve?
Romani: Our issuance activity is a combination of a strategic view and the tactical capacity to react to market demand. In our case the 30 year was the result of a combination of these strategic and tactical approaches.
It was the right moment to issue, because all the parameters were in line at the beginning of last year, including another element that I would like to stress, the new International Accounting Standards enforced in the European Union in January 2005 by the EU IAS Regulation of July 2002, which without a doubt favoured issuance at the long end at the beginning of last year.
And what is important for us is that we view each transaction within its context.
Last year we were able to add a new maturity spectrum to our curve (a new opportunity also on the lending side), strengthening our perception and new issue potential in all maturities and currencies. We were able to extend average maturity effectively and on attractive relative terms, at the same time improving our average funding cost vis-à-vis the previous year, despite tightening swap spreads.
This is a very important thing to consider because no transaction can be assessed individually. It needs to be seen in the context of the contribution it can make to the overall funding policy of the issuer over time, and definitely that was the most fruitful moment to issue that bond.
In this perspective, I agree that issuers have to respond to prevailing market demand. Last year it was for 30 years. This year it has been for five years and 10 years remains one of the core maturities for any issuer that has a regular policy in the market.
This said, it is the management of the existing curve that is becoming increasingly important for the balance you are referring to, an issue that the EIB started to tackle last year (in full cooperation with its secondary market dealers) via a first auction-based liquidity allocation procedure.
EuroWeek: Turning to dollars, how has the reintroduction of the 30 year Treasury affected opportunities in that market?
Dent: The on-the-run benchmark has certainly provided a liquid pricing reference for people to use and to compare their own issuance to. It has given the market a whole new focus in terms of volume and the fact that they can see that there is still plenty of international demand heading into the long end of the Treasury curve. That has enabled people to use it as a new pricing reference away from the three, five and 10 year liquid points that they have had before.
EuroWeek: The EIB issued into that dynamic. Do you [EIB] expect to be more active in 10s and 30s in future? Or is it too early to say whether that will become a more regular part of your benchmark strategy in dollars?
Kreivi: Our strategy in dollars is to replicate the Treasury curve, ie to have liquid benchmarks at the same points where there is a Treasury benchmark. So when they reintroduced the 30 year, for us it was a natural move to try to replicate that point as well and bring a 30 year, which, indeed, we did very soon after the Treasury came.
This year there has been more long term issuance than there was, for example, last year, which was a very short term year in general. This year we managed to increase the size of our 10 year issue and we brought the 30 year.
Whether this 30 year is a permanent feature and whether it will be a more important one is an open question. So far the volumes outstanding in 30 years in dollars are not enormous compared to the other maturities, so we are still at the very beginning.
I would certainly hope that we can keep that sector alive for us, and in a mature market we need these ultra-long maturities. There are people who need duration and there are people who want to have it for trading purposes, so it is certainly something that has a raison d'être. So I very much hope so.
Whether that is going to be an annual exercise, I don't know. Demand will show us what the impact of pension reform will be on the bond market. It remains to be seen whether it is going to impact the dollar market to the same extent as it has the euro market.
EuroWeek: There has been a lot made of pension reform in the Netherlands. Is that something that was exaggerated, or is it something that there and elsewhere in Europe is very much coming through?
Gower: I have to say that on a European perspective it was somewhat exaggerated, not in terms of the reform itself, but in terms of the effect that it would have on the bond market, in the sense that people might be buying longer dated bonds in order to deal with the impact of the reforms.
Many of the larger pension funds in the Netherlands with which Rabobank has a relationship were very clear at the outset in saying that they would actually rather use derivatives as a means of finding a solution than actually looking at longer dated cash bonds, and that is what eventually happened.
That being said, there was clearly an increase in demand at the long end, but a lot of the long end demand, even from the Dutch pension funds, is very lumpy. As a result of that, certainly the long end demand that we have seen has been very specific to individual investors. This means that those issuers that have been best positioned to benefit from that increase in liquidity at the very long end are those that have been able to offer a full product range as a borrower, that have been able to tailor-make products specifically for one account as a quasi-private placement, whether it be lightly structured or plain vanilla.
At the same time, Rabobank did issue a 2021 benchmark earlier this year and that was as a direct result of the lengthening in duration that has been the case for a lot of accounts.
Seissinger: Returning to the dollar market, we too held discussions about our interest in a 30 year maturity, but there we faced the same situation as in the euro. We don't have a need on our asset side for 30 year duration. We see the need to offer such long terms if there is strong demand, but we are not prepared to pay any price just to extend our yield curve, and that is true in euros as well as in dollars. If we can fund ourselves at attractive terms and conditions in the longer end, which means beyond 15 years in euros or 10 years in dollars, then we'll do it. One example is the zero coupon bond we launched with a 30 year maturity in dollars. This was an interesting opportunity for us and we decided to go ahead.
Regarding the question about pension funds and what impact on demand has been observed, our experience is that the demand is below the expectations of the market. However, we would share the view that there is a strong trend for longer duration and we should be prepared for stronger demand over the coming years.
Cœuré: In terms of pension reform and its effect on the bond market, we have been lucky in the euro market not to see the kind of rush to the exit which was seen in the sterling market. One reason is certainly that Dutch regulation is probably less stringent than the UK regulation.
But another reason is that the euro market is deeper and wider, so there is a more diverse range of investors and the market can absorb changes more easily. To a large extent any new development in demand can be cleared by the market itself.
That said, this development of liability-driven demand will certainly back further ultra-long issuance from sovereigns.
To us it doesn't matter so much whether the liability-driven investment is implemented through cash or swaps, because at the end of the day somebody has to pay the duration. So even if pension funds do their hedging transactions through the swap market, then the dealers will have to at some point hedge their duration and buy bonds. So whether the mechanism is direct or indirect, at the end it is not that important.
EuroWeek: Interest in programmatic retail distribution has ebbed and flowed over recent years. However, there have been some recent developments. Is it something that issuers believe to be gaining in importance?
McGregor: People don't always think of Merrill Lynch as a European retail house, but I'm glad to say that this year, working very closely with the EIB over the last 12 months, we have used our structuring team and worked closely with other banks to build up a good retail franchise. Issuers such as KfW, EIB and Rabobank have all benefited from that build-up.
The ultimate fruition of the effort that went into that sector, coupled with some of the legislative changes that we have seen, was clearly the EIB's Eu1bn EPOS trade just before the summer.
Romani: To clarify what EPOS is, the acronym stands for European Public Offering of Securities: the bonds are offered via simultaneous domestic public offerings in multiple countries of the European Union, maximising the potential for distribution. Basically it is a new way to offer EIB bonds on a large scale and with universal features to investors across the European Union, both institutional and retail.
In line with parallel steps by the European Commission, the European Parliament and the European Central Bank, the initiative aims to foster European financial integration and deliver its material advantages to the public, particularly in the retail sector.
The idea is simply that the market is becoming increasingly integrated. There is an increasing trend towards cross-border consolidation and co-operation among banks with strong regional presence within the EU, and legislative mechanisms exist (eg the EU Prospectus Directive) that now permit issuers to sell bonds to national investor bases in a uniform way throughout the union.
We tried to see whether it was possible to use these legislative mechanisms to raise the interest of a multiplicity of banks, one for each country of the euro zone, and to try to combine a minimum of underwriting commitment with a maximum of publicity in order to achieve larger distribution for bonds that might not normally be sold in such a way — for example, structured bonds. The experience has been very positive.
The important element to stress here is that these mechanisms exist and they work well. They can be used to revive a classical technique, which is basically syndication, in a way that permits issuers to achieve broader distribution, reaching retail accounts in a larger number of countries with products that have been in demand but basically only on a very fragmented basis so far. This technique can be used in a flexible way, not necessarily on as large a scale as we used for the inaugural issue, but still to aggregate investor interest and permit co-operation among retail banks in Europe to grow at the service of the final investor. That is already happening spontaneously, but we can help the process and produce results that are beneficial both to the issuer and investors: larger issue size and diversification versus other products normally distributed by retail networks; easier public access to the bonds, multiple and therefore more service-oriented bank intermediation, multiple national listings and therefore higher transparency in the secondary market.
EuroWeek: Do other issuers see a future for that kind of issuance?
Seissinger: A few years ago we started with the COINS programme. This had a very successful start. However, it was launched at a time when we had a low interest rate environment and in such market conditions demand shifted in a direction where people were prepared to take greater risks to earn a yield pick-up.
The main trend we see today in the retail market is an interest in taking currency risk. Here we have been quite active over the past few months as we have issued in various currencies. At the same time retail investors want to avoid credit risk and that is a big advantage for the triple-A rated borrowers in these markets.
Cœuré: On the French side this is also a topical issue for us because we revamped our retail distribution earlier this year. We had an old system that didn't really deliver the results we expected. We therefore reflected a lot on the technology that was possible and whether it would make sense for us to develop our own proprietary distribution system.
We came to the conclusion in our case that it is not our core business to sell bonds to retail investors. This is the dealers' job, not ours. So we have opted for a very light system whereby all tradable French bonds are channelled to a specific platform on Euronext and all banks can connect their own electronic retail platforms to this one platform, so it is a kind of liquidity pool that all retail distributors, banks or brokers can access and then pass on to their clients. It is really therefore more of an innovation in terms of organisation than products.
The value we see in that is that it allows us to offer to retail clients all outstanding bonds, and in particular it makes possible the distribution of inflation-linked bonds. We think that in terms of demand from the retail clients, maybe the most promising development will be demand for inflation-protected bonds as a way for households to tailor-make investments for their pensions as a complement to collective savings through pension funds.
Gower: From Rabobank's point of view, and to touch on something that Eila mentioned earlier regarding niche currencies, a lot of the retail demand that we have seen, certainly in Europe and to a slightly lesser extent in Asia, has been very much focused on currency plays. So far Rabobank has issued in 16 currencies this year, two or three of which have been new. For example, we launched a transaction in Israeli shekels, which from a financial institutions perspective was certainly something of a first and was in response to direct retail investor demand in central Europe.
Away from European retail, one part of the world that has very much surprised us in terms of the strength of retail demand has been the Uridashi market. Rabobank this year has executed more Uridashis than it has in any 12 month period before, and there seems at the moment to be no real sign of this slowing down, which from a triple-A borrower perspective is quite encouraging.
Returning to the COINS platform, certainly we agree with Horst's comments. Initially we were quite excited about the programme: it got off to a good start, and, being at the lower end of the triple-A spectrum, Rabobank was hoping to perhaps offer a little bit of a pick-up in yield to bring in some of the European investors.
The timing was unfortunate, just given the backdrop of a low interest rate environment. Certainly within the Benelux retail arena customers were able to actually attain higher deposit rates on over-the-counter bank accounts, and that was really limiting the amount of demand that could come into the product at the time.
As seen in the US with a lot of the deposit note type of programmes or frequent issuer programmes in the past, from the automakers for example, in a higher interest rate environment — and perhaps there is also a discussion to be had on spread levels — I think these programmes can provide beneficial liquidity for issuers over a period of time. But unfortunately they have not done so for us in the past 24 months.
EuroWeek: There is clearly then a pick-up in retail demand for non-core currencies. Have there been similar moves on the institutional side? I understand that there have been some developments in Canadian dollars, for example.
McGregor: There were changes to legislation there last year — and this again comes back to the pensions story — the foreign holding limit was removed, partly because the pensions and insurance industry was unable to get the types of products and more specifically the duration of product domestically that they need. Canada and the provinces are running such a tight ship these days, and obviously they are looking at surpluses rather than deficits. Outstanding debt has therefore been dwindling. So they have opened the arena for other names.
As with the development of many markets, different sectors have developed at different speeds. The biggest growth in the Maple market has certainly been in the financial institution world. Often when you open up a new set of names to investors, it is not surprising to see that they choose the slightly better yielding names first.
But we are very optimistic that further down the road names that provide better quality and higher liquidity are going to see a bigger benefit. This year we have been in the market with KfW, Bank Nederlandse Gemeenten, Instituto de Crédito Oficial and Network Rail in the supra, sovereign and agency space, but unlike in the dollar, the sterling and the euro markets, where supply from such credits really does mirror the underlying government securities, the Maple market still has not yet developed to that stage. But globally it is certainly one of the more interesting markets. It is probably two to three years behind the Kangaroo market in its development at this time.
EuroWeek: Horst, are you hopeful of bigger things in future in Canadian dollars?
Seissinger: It is difficult to foresee how demand will develop, but it is our intention in these markets as well to adopt a strategic approach. We aim at establishing a yield curve and want to focus on increasing bonds so that at a later stage they reach a certain liquidity.
Because the Canadian dollar market is definitely one of the markets where we have to rely on developments in the cross-currency swap market — we don't have a lot of assets in Canadian dollars and have to swap back into US dollars — and in order to ensure that investors have permanent access to KfW bonds we focus on issuing liquid products. This means that if issuers are not able to issue in the primary market, investors still have the opportunity to buy our bonds in the secondary market.
So for us the Canadian dollar market — and this is also true for the Australian dollar market — is an important one, in which we have a long term strategic view and to which we want to have permanent access.
EuroWeek: Looking at other institutional markets, I understand that the sterling market is being driven more by Asian demand than in the past.
Seissinger: Clearly Asian demand in sterling has been very significant over the last two or three years, and its important is increasing. That is particularly the case for bonds with shorter or medium maturities, where we are seeing new investors involved alongside the pension funds from the UK that have always been present.
The long end is still clearly based on institutional demand in the UK and, regarding this part of the curve, sterling has been one of the currencies that has been a surprisingly good market this year. We have seen a lot of demand and been able to issue much more than we had expected.
EuroWeek: Are there any otherm currencies that have exceeded issuers' expectations?
Kreivi: On our side, the activity in the non-core currencies in general has been very high, and I believe that has been the case for others as well. In the non-euro, non-dollar, non-sterling currencies we have traditionally raised around 10%-12% of our funding, but so far this year we have done approximately 20% in non-core currencies, which really is a record number. That includes currencies such as yen and Australian dollars, and all the emerging market currencies as well.
A couple of currencies that have surprised us on the positive side this year have been the Australian dollar and Turkish lira. The Turkish lira market was already quite active last year and it has continued to be so into this year, in spite of the turbulence that we have had in the emerging markets.
And Australian dollars has given us more funding than we had expected at the beginning of the year. This has meant that we have been able to increase a little bit our issuance sizes there and change a little bit the pattern of our issuance.
So the whole non-core sector has certainly been very important, and as Michael said earlier, retail demand is important in the more exotic currencies, and then you have currencies like Australian dollars and yen, which are mainly institutionally derived. And with Australian dollars and New Zealand dollars, as is the case for sterling, there has been a very clear pattern of increasing demand out of Asia, including Japan, for those currencies, and that is obviously one thing that has helped to increase the issuance sizes in those markets.
We believe that the non-core currencies will continue to play a significant role in our funding.
EuroWeek: That fits in with the talk there has been of Asian accounts diversifying their portfolios away from dollars. How has Asian demand for dollars been this year?
Dent: Asia continues to be one of the key driving forces behind the demand that we have seen in the high grade dollar universe. Certainly throughout the course of the year they have consistently been anywhere between 40% and 60% of books that we have seen in the dollar market. We don't really see that changing too much.
Within that range certainly one of the key things that Asian investors are focused on at the moment is simply outright interest rate levels. I think that's the key thing at the moment, that while they continue to be driving these transactions, they are also very rate sensitive and that remains true, particularly in the environment that we have at the moment.
We have seen deals that are very hit and miss between a particular coupon level, and going forward that comes back to what we were talking about earlier with regard to timing in the dollar market. Certainly you have to pick your spots, particularly as there are lots of data points to work around. But assuming that you can pick the right spot, then certainly when they are involved they are involved very heavily, and they still continue to be the driving force that we have seen for some time.
EuroWeek: Some people have mentioned that while being very sensitive to coupons and absolute yields, investors are looking a bit more at relative value, at Libor levels. Is that something that issuers have found in the dollar market, that they might have to pay a bit more of a premium to secondary market levels than in previous years?
Kreivi: That's fair to say, yes. In general terms, dollar demand out of Asia still continues to be very strong. What has, however, been seen is some sort of diversification on their part in terms of the asset classes these investors are buying. It is not only the SSA sector alongside treasuries anymore. There is increasing demand for dollar denominated asset backed securities, mortgage backed securities, corporate bonds, and so on from Asia.
So yes, there has been a slight shift. But it is also fair to say that the Asian investor base is still probably the most solid and most consistent investor base among the three continents for US dollar high grade product.
Seissinger: This view is one that we share. At the same time, what we have seen, especially in the dollar market, has been an increase in demand from European investors. While this has perhaps not driven transactions, it has nevertheless had a substantial influence on activity.
Kreivi: Yes. Europe has played a bigger role this year.
Gower: Rabobank has always struggled somewhat on the public global dollar side, not being an official institution. But certainly over the last six to 12 months, there has been a noticeable difference in the actions of Asian accounts in that they are differentiating more from a relative value perspective. As a result of this they are not only happier to buy Rabobank paper but, more than that, they are specifically asking for Rabobank paper on a private placement basis if they see some differentiation from a spread perspective.
That trend has continued, particularly on the structured product side, where accounts which in the past have not been able to buy Rabobank, or have not been willing to diversify into financial institutions or traditional credit, are now looking to buy and are looking to buy in size. For us that is certainly an encouraging sign.
EuroWeek: How has demand from the US evolved this year?
Dent: We have been talking about Asia obviously being a key force in the dollar market, and that is certainly the case, but one of the most pleasing things we have seen this year is demand from across the globe. Something that we have seen in most of the global offerings this year is the fact that all the three major regions performed extremely well.
With regard to the US, obviously in terms of the SSA world, we have continued to see GSE spreads trading very tightly to Libor, which is proving a very good comparable to alternative names in the US. But we have also had continued involvement out of domestic US accounts for alternative names, and that continues, and that is certainly one of the most pleasing aspects that we have seen this year.
Kreivi: US demand in EIB's case has been quite good, especially in the longer maturities. There you can reach quite high percentages in terms of placement to the US.
However, it is not something that is consistent and that you can rely upon, which is always there. Every time you do an issue there is a little bit of a question mark when you start off, just how much will be sold to the US and which accounts we will get in the book.
With the GSEs having richened quite a lot over the last year or so, especially in terms of new issues and primary market pricing, the differential has really disappeared between our kind of names and the GSEs, and yet we have not seen a remarkable increase in demand for our credits from the US. This is a little bit of a mystery to me as I think there should be a little bit more interest.
In previous years when EIB and the rest of our sector were trading substantially through the GSEs, we understood the relative value arguments that explained why creating demand in the US is not an easy play. But you would imagine that at these kinds of levels there should be remarkably more interest and we haven't really seen a big pattern there.
McGregor: The hardest thing about the US investor base with regard to the global SSA product away from GSEs is the lack of any real pattern or consistency in demand. We have seen some transactions that have gained great traction out there, especially in the longer end, the 30 year securities. But to be honest the most remarkable thing we did see with the 30 year securities was the amount of demand out of Europe, which although not the major part of demand was surprisingly high.
The sort of dynamics we are seeing in the US suggest, as Eila says, that we should be seeing more placement there, but it is something of a work in progress. GSE supply has risen this year, but needless to say eventually we will get better demand out of the US.
Seissinger: The main lesson that we have learned this year in the dollar market comes back to what I mentioned at the beginning: we have to react to actual demand. We have to move very fast and we have to bear in mind that sometimes it is more difficult to reach the size of the traditional benchmarks we have launched in US dollars.
That is an area where we have seen a shift this year. It is much more difficult in the dollar market to issue a $3bn transaction. At the same time, the market is also very keen on smaller transactions. In the past we thought that they were not as attractive to investors as the larger ones because of a potential lack of liquidity. But there has been a change in investors' requirements and they are again interested in smaller deals as long as they fit in with investors' duration wishes.
EuroWeek: There have been suggestions in the past that the EIB was being overambitious with the size of its dollar benchmarks, but this year you appear to have been quite successful with your strategy. Have you answered the critics?
Kreivi: We have now done every maturity on the curve this year, and we have done them all in the $3bn size, except for the 10 year, which, at $2bn, was nevertheless a larger size than in the past, and the new 30 year, which was $1bn. Every single one of them has been quite heavily oversubscribed and very successful, so this discussion has died away.
EuroWeek: How do you expect the interest rate outlook, with the Fed on hold, to affect demand?
Gower: The lack of clarity that has re-emerged over the last month or so has certainly been a cause of concern for the investors who are large buyers of Rabobank paper, so for Rabobank it has been somewhat beneficial, in that there is a continued necessity for safe haven assets. And for Rabobank, as a triple-A issuer that is perceived to offer perhaps a bigger yield than the other participants, that is a positive.
As a macro comment, the current uncertainty is not particularly constructive for the market. The outlook for the second half of the year from our point of view is somewhat mixed, and a lot of the larger borrowers have frontloaded as we have. That is certainly a better position to be in than looking to do more than 50% of your funding in what practically speaking are 12 good issuance weeks.
Unless there is a fairly dramatic shift in clarity on the rates side I don't really foresee the picture being anything other than mixed, certainly until the end of the year.
EuroWeek: We have seen a new participant in the inflation-linked market this year, namely Germany with its first inflation-linked Bund. Is the inflation-linked market developing as expected?
Coeuré: It is less exciting than it used to be, but that is good news, because it shows that the market is maturing. We see more dealers participating in the market. We see new investors coming to the market. And in this respect the fact that Germany has issued an index-linked Bund is certainly good news because it will help bring new investors to the market, so it will probably in a sense create its own demand.
What has been relatively surprising for us so far has been the very strong demand for French inflation. There is a debate as to whether there should be one single index for the European market, or whether sovereigns should issue on their domestic price indices, and so far what we have found in France is that we have strong and sustainable demand for French inflation.
This is partly due to the regulatory framework, to the fact that the regulated savings accounts are linked to the inflation rate, but not only this factor. Increasingly we also see structured finance deals, for instance, having a component related to French inflation. This doesn't necessarily turn into direct demand for linkers, but it creates demand for inflation swaps and then for linkers. What has been surprising is this resilience of the domestic segment of the market.
Another point has been the international diversification we have seen. We have launched a new medium term note, the BTANei maturing in 2010, and we have seen substantial Asian demand for this kind of paper. Four year paper indexed to European inflation is something that now clearly appeals to Asian investors and that is something new.
Seissinger: Benoît has highlighted the importance of sovereign issuance in this market and we share this view. We do believe that the Bund, with its first linker, as well as the established French market pave the way for issuers who cannot take the inflation risk, because these issues will increase liquidity in the swap market and this will provide us with the opportunity to broaden the range of products we can offer to investors. Therefore from the point of view of KfW, this increased activity in the inflation linker market, is very much appreciated.
McGregor: The structure we chose on the EIB EPOS trade was inflation-linked as well, and the reason for that is that inflation is not now just a product for the pension funds and other highly sophisticated investors. It is now something that is fully accepted and understood all the way down to the retail side, and we have certainly seen far more structured notes this year, so it appears that inflation is one of the key reference points out there at the moment.
Romani: The EPOS was linked to European inflation because the transaction targeted the totality of the countries of the euro zone. It was a kind of minimum common denominator that it was possible to arrange a structure around.
EuroWeek: Would anyone like to add any final remarks?
Coeuré: A general point on the sovereign side is that the European economy is doing better than expected and we can expect issuance to be lower than expected in 2006. This is the first time for years that we are in an upturn.
In line with our previous discussion on flexibility, it is always challenging for sovereign issuers to adapt their issuance plans in the course of the year, and to decide whether we should cut T-bill supply or if we can afford to cut bond issuance, and if so in which maturity.
However, it is a positive challenge to face.