The FOMC raised US interest rates this week but failed to calm the Treasury market. Although the long bond remained steady in post-FOMC trading, the yield curve flattened as traders priced in further interest rate hikes at the short end. The negative tone in the US spread to European government bond markets where investors were happy to take profits after the short lived rally which followed the ECB rate hike of last week. But the weakening government markets only helped US and European credit markets as tightening swap spreads boosted sentiment. Freddie Mac continued the string of agency firsts with the launch of its debut 30 year issue. First talked in the 73bp area over, the $2bn deal was priced at 69bp over as swap spreads tightened, but still enjoyed strong demand as investors moved to the long end to benefit from post-FOMC yield curve flattening. Canada took advantage of the healthy tone to launch a rare five year dollar transaction which lived up to its global tag, garnering demand from Europe and Asia as well as the US. Initially announced at $1bn in the 50bp area over Treasuries, the size was then upped to $1.5bn in the 49bp area, before being priced at 49bp over at a final issue size of $2bn. Next week's activity should be subdued by Thursday's Thanksgiving holiday and also a Japanese holiday on Tuesday. Euro issuance was lacklustre this week, with borrowers now joining investors in finding reasons to stay away from the market. Aside from several taps, new issuance was centred on safe credits. The EIB attempted to benefit from investors' search for a neutral haven for their funds with the launch of its first new EARN since the announcement of the benchmark programme. Despite winning a more favourable reception than recent EARNs reopenings, the Eu2bn April 2006 transaction failed to enliven the market at 38bp over the matching OAT, but nevertheless traded 1bp tighter against OATs in the aftermarket. ICO's second euro benchmark, a Eu500m three year, was favourably received at 19bp over the February 2003 Bobl. The deal won support from both institutional and retail accounts across Europe. Corporate supply was limited, but yesterday (Thursday) Xerox launched its Eu500m five year via JP Morgan and Salomon Smith Barney with pricing today. Announced with an indicated spread range of 72bp to 74bp over, the deal is likely to be priced at 73bp over and could be upped to Eu750m. Crown Cork and Seal ends roadshows for its Eu250m five year and should launch next week via JP Morgan and Salomon Smith Barney. Pricing of BTANs plus 140bp area or Euribor plus 110bp equivalent is expected, wider than the 95bp-100bp anticipated last week. Gas Natural's inaugural Euro-MTN issue of Eu500m via Invercaixa and Merrill Lynch has been postponed due to difficulties, Repsol - the company's largest shareholder - having consolidating its interests. Caisse Nationale des Caisses d'Epargne will on Monday launch a three year floater via BNP and Deutsche. Bankers suggest that the size will be Eu300m and that the deal will pay a margin of 10bp to 12bp over Euribor. The resurgent yen market continued to provide attractive funding opportunities for borrowers, and after General Motors successfully got away its ¥50bn global last Friday, Ford Motor Credit added to the supply with a ¥30bn Euroyen issue. Both transactions were targeted to satisfy strong Japanese demand for yen assets issued by single-A borrowers offering yield pick-up. Several samurai bonds are now expected from Xerox, Volvo, Deutsche and KDB. Triple-A issuers continue to proliferate in the sterling market, which this week produced a string of taps from the EIB, World Bank, Fannie Mae, IFC and PSK, all concentrating on the long end of the curve. New issues were launched by 3i with a £180m bond maturing in 2032, DTA with a £150m 2011 transaction; future deals are expected from SEK, Stadtkraft, GMAC, all at the long end. Dutch insurer Aegon is roadshowing with UK investors to launch a sterling bond to partly refinance its recent purchase of GRE's life operations. Barclays and Warburg have been mandated as joint bookrunners.
November 19, 1999
