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A version of this article first appeared in Total Derivatives.
Total Derivatives is the prime source of real-time news and analysis of the global fixed income markets. |
Vincenzo.Pelosi@TotalDerivatives.com • Greece sees room for up to €1.5bn 50s in H1
• 50y enthusiasm justified?
• Demand for duration not as strong as it was
• Germany, Netherlands not looking at 50y
• Pricing mulled
Greece sees room for up to €1.5bn 50s in H1
Greece is planning to issue up to €1.5bn in 50-year bonds through a private placement in the first half of this year, the director general of the sovereign’s public debt management agency said today.
In an interview with Total Derivatives, PDMA head Spyros Papanicolaou said Greece has received proposals for such a deal from “a number of banks” in the last few months. “We are looking at doing anything from €500m to €1.5bn maximum some time in the first half of this year. But it will be in the context of a private placement,” he said.
Mr. Papanicolaou said the sovereign would not consider syndicating the deal, adding that any 50-year bond would not form part of its official issuance schedule. “On top of our announced syndications and auctions we can raise an extra €2-4bn in structured notes and the 50-year will be part of that amount,” he noted.
He said any 50-year note would be targeted at “real money accounts”, particularly pension funds with a need for longer-duration assets. “Some of it could also go to central banks,” he added. Papanicolaou declined to give any price guidance, saying it was “far too early in the process” to give such details.
Greece is not the only sovereign looking to issue 50-year paper this year. France confirmed in December that it would tap its 2055 OAT sometime in 2007 while Italy last week said it was looking at the possibility of a 50-year deal for launch this year.
50y enthusiasm justified?
But is all this enthusiasm for 50-year issuance justified? Market watchers are divided over how positive the backdrop is for the issuance of 50-year paper.
According to analysts at ABN Amro, the investor base for long-dated debt continues to grow as pension funds across Europe look to steadily increase purchases of such paper in a bid to meet ever tighter solvency requirements.
“Our view is that growing ALM type of investor base helps demand, [and that 50-year is an] attractive issuance location,” ABN said. “50-year private placements would be especially attractive to small funds.”
The bank points out that many small funds would find 50-year paper particularly useful as they have liabilities that extend way beyond the industry average – as much as 80-years for some Dutch funds.
“The fact that it’s Italy and Greece [considering 50-year] is somewhat surprising but not a shocker. The periphery would be interesting to any account that is benchmarked off Libor”, ABN said.
Demand for duration not as strong as it was
Others are not so optimistic, arguing that recent regulatory shifts in both Danish and Swedish pension fund industries and figures from the two largest Dutch pension funds, suggest that demand for long-dated debt among those institutions most likely to need such paper might be moderating.
“Overall, the need for duration is arguably not as strong as it was, say 12 months ago,” one analyst at a European bank said. “With equity markets having performed well, pension fund cover ratios are at pretty healthy levels, which suggests less need for long-dated assets.”
Some traders said the somewhat unenthusiastic response to today’s €6bn 30-year Bund auction – which garnered a bid/cover ratio of only 1.2 – serves to underline the fact that appetite for duration is on the wane.
Germany, Netherlands not looking at 50y
Indeed, the enthusiasm for 50-year issuance among other Eurozone sovereign borrowers is hardly overwhelming.
For their part, Germany and the Netherlands see no real need to issue 50-year debt. The head of the German debt agency Gerhard Schleif told Total Derivatives this week that the sovereign has “no plans” to issue 50-year debt this year. “It is not going to happen this year. It does not make sense to us right now,” he said. “It does not fit in with our strategy.” He added that even though Italy and others are looking to issue 50-year paper, the German agency has not been approached by banks with proposals for a 50-year bond.
The prospect of further long-dated supply from the Netherlands is also pretty remote, an official at the Dutch State Treasury Agency told Total Derivatives. “We have no plans to issue 50-year bonds to date,” the official said. “Our borrowing plans are based on consistency and not so much led at all by any shifts in demand for long-dated debt”.
Pricing mulled
As far as pricing is concerned, neither Greece nor Italy can hope to price their prospective issues “at anywhere near where the France deal is trading”, according to one analyst at a European bank.
He said with 30-year BTPs and GGBs trading at around 12bps over swaps, both sovereign borrowers would have to price their issues “at around the 20bps mark” to compensate investors for the greater risk.
“But of course, if the bonds are to be placed privately, as seems to be the case, there is a strong possibility that they will be able to price below that kind of level,” the analyst said.
Another UK-based strategist said it was highly unlikely that either sovereign would be able to price 50-year debt at yields below those of outstanding 30-year paper – even though the 50y OAT, with €11bn in issue, currently trades at around 6bps through the 30y OAT in yield terms.
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A version of this article first appeared in Total Derivatives.
Total Derivatives is the prime source of real-time news and analysis of the global fixed income markets. |
