When a sovereign surrogate attracts its biggest ever order book for its first 30-year euro deal, it proves that liability matching by pension funds and insurers is now a prime mover of the European capital markets, right? Well, up to a point. The EIB launched its October 2037 deal last month. The Euro Area Reference Note (Earn) attracted e11 billion of orders.
"Behind the over-enthusiastic promotion of long-dated demand, the trade went well for old-fashioned reasons," says a banker close to the EIB. "Somewhere in their psychology, investors are trying to extend duration for matching purposes, but it's at the back of the equation. European fundamentals are weak and the interest rate structure is not going to change. Asset managers need to hit yield targets and hedge funds are looking for yield, so when they see a 4% coupon, they move in."
Asset managers bought 27% of the deal, banks 23%, insurers 12%, official accounts 7% and pension funds 6%.
The EIB says that liability matching is more clearly at work in the deal. "The success of this issue is the result of changes in the institutional framework of Europe's pension systems becoming material," says Aldo Romani, deputy head of euro funding at the EIB.