Ostensibly, 2005 began in blistering fashion for the cream of Europe’s supranational borrowers in the dollar market. Within 48 hours of one another in the second week of January, the European Investment Bank and KfW printed exceptionally well-supported three-year and five-year transactions, raising $3 billion apiece. For KfW, in particular, which in the same week generated demand of €11 billion for a €5 billion deal that was its first ever 15-year euro benchmark, the dollar transaction – its largest five-year since 2002 – wrapped up an especially satisfying week.
“We closed the book within about 24 hours with a level of demand we had not seen in the dollar market for at least two years,” says Horst Seissinger, head of capital markets at KfW’s Frankfurt headquarters.
Good start
That’s fair enough. But as bankers point out, both the EIB and KfW needed to pay up to ensure that they kicked off their dollar issuance for 2006 so successfully. The EIB deal priced at 25 basis points over the US treasury curve, with KfW’s longer deal paying 33bp over – equivalent to Libor less 19.5bp and 16bp respectively. Those levels amounted to a marginal cheapening of both borrowers’ dollar curve, which raised a few eyebrows among investment bankers.
“The rule in the past 18 months or so is that you wouldn’t approach the EIB if you didn’t have dollar Libor minus 20bp in your back pocket as a minimum all-in level,” says a London-based syndicate head. “The EIB’s pricing suggests an all-in level in the area of dollar Libor less 17bp, which does suggest a fairly fundamental shift.”
Others agree, offering a range of explanations for the apparent repricing, although they caution against the assumption that it amounts to a shift in the balance of power between euros and dollars. The story of central banks, in particular those in Asia, offloading dollars in favour of euros is already an old one, and is in any case likely to have no more than a very gradual impact on supply-demand dynamics in the bond market.
More persuasive, perhaps, is the suggestion offered by one London syndicate head that the cheapening of the dollar curve might indicate that the market is accommodating a much broader range of non-US triple-A borrowers. Above all, he says, it is turning an increasingly receptive eye to covered bonds offering a healthy pick-up to comparably rated sovereign and supranational paper.
“After the German sovereign came to the dollar market in June and widened out within a week, I think that a number of central banks began to reappraise their dollar exposure,” he says. “Some concluded that if expensive triple As could widen as Germany had, they would be better off looking for cheaper triple-A bonds. That may be why we saw the dollar market open up for covered bond issuers like CFF, Depfa and Hypothekenbank in Essen in the second half of 2005. I see that trend gathering momentum in 2006, with spreads between the supranationals and covered bonds continuing to converge.”
If that assessment is accurate, expect 2006 to be the year in which Europe’s increasingly diverse covered bond issuers decisively crack the dollar market for the first time.