In normal times, you wouldn't instinctively bet on the Bundesrepublik Deutschland Finanzagentur to put the cat among the pigeons. But on Tuesday it said this:
"In addition, the Federal government intends to conduct syndicates in the second quarter."
Yes, you read that right. Germany is going to sell bonds through syndications.
To say this has left SSA bankers open-mouthed would be an understatement even in these interesting times. For run-of-the-mill euro funding, Germany does auctions, not syndications. Even its long-discussed green bond has always been touted as an auction.
Not for nothing does one head of SSA describe the move as the biggest story in his business. And things had been starting to settle down, hadn't they? As I write, bankers are talking of Wednesday as being the quietest day for weeks.
So, what brought Germany to this? And what does it mean?
Let's wind the clock back a bit. After a largely excellent January and February for SSA borrowers, the rapid escalation of the coronavirus crisis in early March brought everything screeching to a halt.
Markets were dislocated in some ways as never before – even including the 2008 crisis. That played out in two ways in those early stages in March.
First, screen levels were meaningless. Big banks were buying at whole percentage points back of the screen bid – and this in the kind of genteel sector where a two-basis-point to 5bp bid-offer is considered racy. Some bonds traded on cash prices!
Issuance stopped. Borrowers have had a lot to get to grips with in the past few weeks, not least hearing from bankers that the traditional 'look at screen and slap on new issue premium' approach to SSA bond pricing that had done rather well for quite a long time might in fact need a tweak or two.
And they were mostly happy to stop, too. The good start to the year had left many well-funded at this point. Few needed or wanted to take the plunge.
In any case, investors were doing the opposite of buying. And as usual in markets where liquidity is suddenly squeezed, it was the best names that suffered. The trend of sell-what-you-can has been more of a corporate bond story in the last few weeks, but SSAs have not escaped completely.
And so it was tier two names or bonds not eligible for central bank programmes that held up best – simply because they couldn't be sold. If you needed to raise liquidity, you sold the best names you had.
Markets were dislocated in some ways as never before – even including the 2008 crisis
A short-end dollar bond from none other than pristine KfW has been the talk of some parts of the market: bought by one bank at 100bp back of screens, apparently. And plenty tell other stories of their own firms buying top names at 50bp wide of where they were quoted.
“There was a problem with getting pricing transparency,” as one banker puts it – proving that the worse the crisis, the more understated the language used to describe it.
The second big thing to have been disrupted in March was swap spreads, particularly in dollars, and the available depth of the swap market. Things are beginning to ease up now, but a week or two ago banks were struggling to find capacity to swap even a billion, let alone the billions they might typically do for a trade.
Spreads were gyrating wildly. When the International Finance Corporation (IFC) brought its three-year $1bn social bond on March 11, it had the market pretty much to itself. When it kicked off, it was marketing at mid-swaps plus 17bp, which at the time was equivalent to Treasuries plus about 21bp. When it finally priced at mid-swaps plus 13bp, it was Treasuries plus 4bp. Ouch.
In corporate land, the real money investor base is still buying, but in some bits of the SSA market those same asset managers, pension funds and insurers want to see a lot more stability before they jump back into names away from sovereigns.
That means some deals have been relying a lot more than usual on central banks and bank treasuries, and the books are smaller. The European Investment Bank got just €3.75 billion for a €3 billion deal that was 60% placed with banks and 18% with central banks.
Some investors, like central banks, are not that interested in looking at deals on a swap spread basis – spread to Treasuries is the more meaningful approach for them. And after the experience of a deal like IFC's, bankers say they are seeing something they haven't seen for about 15 years – deals being marketed on a spread-to-Treasuries basis rather than on swap spread. They are certainly having to get used to a lot of new things quite quickly.
But back to Germany. Its new syndications were announced in an update to its second quarter 2020 issuance schedule. And it's an eye-watering update in other ways too. In just the two weeks since the previous disclosure, it has increased its planned auction volume by 50%, to €130.5 billion.
Auctions are all well and good in smoothly functioning markets, but Germany has seen a couple struggle in recent weeks. One message from its new syndication plans is that there's little expectation of smooth functioning for some time. Central bank support has restored some normality to primary issuance – as witnessed by the extraordinary flow of deals in the last couple of weeks, with record books becoming a trend. But no one pretends it is business as usual yet.
A second message is that there is an awful lot of previously unplanned issuance to come. And that means Germany needs to understand a lot more about its potential investor base – how deep it can be and what it will be prepared to take. The kind of information that syndication gives you.
After all, when stimulus is being thrown around like so much confetti, the sight of a €10 billion seven-year from Spain gives a pretty clear indication of where the funding for it all is going to have to come from.