The prospect of a gradual rise in long-term interest rates in the US is significant for the highest grade sovereign, supranational and agency issuers, but there are other factors helping maintain healthy demand for their bonds.

Participants:

  • Ambroise Fayolle, chief executive officer, Agence France Trésor (Standard & Poor’s: AA/stable; Moody’s: Aa1/negative)
  • Anish Gupta, director of international finance, Österreichische Kontrollbank (AA+/stable; Aaa/negative)
  • Bogdan Klimaszewski, deputy director of public debt, Polish Ministry of Finance (A-/stable; A2/stable)
  • Eila Kreivi, director and head of capital markets, European Investment Bank (AAA/stable; Aaa/negative)
  • Isabelle Laurent, deputy treasurer and head of funding, European Bank for Reconstruction and Development (AAA/stable; Aaa/stable)
  • Philippe Noël, head of capital markets, Caisse d’Amortissement de la Dette Sociale (AA/stable; Aa1/negative)
  • Huib-Jan de Ruijter, director of financial markets, FMO (AA+/stable; AAA/negative [Fitch])

Q: What conditions in the sovereign, supranational and agency [SSA] funding markets do you anticipate during 2014?

Isabelle Laurent: We continue to expect strong demand for AAA rated supranationals over the course of 2014 in a variety of currencies and markets, and it will be underpinned by traditional SSA buyers. The collapse of the euro/US dollar basis swap may see a number of euro funders focus more on the euro market, providing more windows for those of us that are more focused on the US dollar market (and, indeed, some US dollar funders may also focus on the euro market). Having said that, there will likely remain a degree of uncertainty about the robustness of the US economy with the Federal Reserve's tapering, which may slow (or even reverse) interest rate rises in 2014, and therefore serve to keep swap spreads low.

Bogdan Klimaszewski: As far as central and eastern Europe is concerned, bonds offerings from the beginning of the year (by Poland and other countries from the region) clearly show that there is a strong appetite for good credits offering some yield pick-up over core markets. The main messages from issuances of bonds by the  Republic of Poland on the euro and US dollar markets in January are broad diversification in terms of geography and a high quality of orders.

High allocations to central banks also confirm the appetite for credit and not only for yields. We expect investors to become more choosy, focusing on key fundamentals such as growth figures, financing requirements, debt levels, current account and fiscal deficits. In this sense, Poland is in a relatively good condition. There will be probably periods of elevated volatility caused by tapering or disturbances in some emerging markets around the world.

Philippe Noël: It has been a good start to the year with plenty of issuance from SSAs, but it is remarkable that there has been a lack of long-term issuance. The shape of the curve in both euros and dollars is most favourable between three and seven years, and I think that will continue. We have a bull market at the moment, so I expect SSAs to concentrate on the short end at least for the first half of the year, hoping that the market will be in better shape for longer term issuance from the second half.

Caisse d’Amortissement de la Dette Sociale had strong demand for its three-year dollar bond in January [$5bn issued against an order book of more than $8bn], which probably reflects the lack of supply in dollars in the three-year section. We have a lot of dollar redemptions ourselves this year and a small outstanding between 2017 and 2020, so this fits our own maturity profile. The nerves about emerging market stocks have helped some flight to quality in 2014.

Anish Gupta: We expect that the general market tone, although positive for the SSA sector, will become more volatile as the risk-off sentiment triggered by developments in the emerging markets has reinforced demand for government paper in the developed world. This would thereby support issuance in the perceived safe haven currencies. We expect yields in the US dollar and euro to be challenged not only by economic prospects in the underlying economies but also on account of uncertainty on the global scale. With the advantages of the euro/US dollar currency basis diminishing we would expect increased euro issuance.

Q: How is the tapering of bond purchases by the US Federal Reserve affecting your financing conditions?

Eila Kreivi: From the European Investment Bank's [EIB’s] perspective, the impact on its financing conditions has so far been rather insignificant. In 2013, the EIB issued a sequence of $5bn benchmarks before the tapering discussion started and in 2014, it has opened the US dollar market already with two benchmark transactions, thereof the first 10-year US dollar global since 2011. The EIB’s spreads remained stable and absolute rates do not have a major impact on the EIB’s funding conditions as almost all proceeds are swapped.

Huib-Jan de Ruijter: We have not witnessed a direct impact on our financing conditions from the tapering itself. We do witness that basis swaps in euro and yen versus the US dollar have come down, which results in improved financing conditions in some other currencies compared to the dollar.

Mr Gupta: Österreichische Kontrollbank's [OKB’s] funding programme focuses mainly on the US dollar sector and will continue to do so in 2014 with short to intermediate benchmark maturities. Differing expectations regarding the timing and the extent of tapering have led to volatility in rates and currency markets since the middle of last year. Given continuing uncertainties over these developments we would expect issuers not to delay their funding programmes, in fact many of them have been very active in the markets so far – putting them ahead on their funding schedules. OKB will have to be nimble in its approach and react quickly to signals of receptive market conditions.

Ambroise Fayolle: The tapering of bond purchases by the Fed has been pushing upwards the French state funding costs in 2013. So far, the magnitude of this increase has been the same as for German bonds and much lower than the one observed for the US and UK bonds. This partial decoupling results from differences in cyclical conditions and the forward guidance formulated by the European Central Bank in the summer 2013 as well as the decrease in its main refinancing rate last November.

Q: How has the composition and geography of your investor base changed over the past year?

Mr Noël: There was a significant change in 2013 compared with 2012. There have been more central banks, especially from Asia, and more US institutional investors and foreign banks. They may have been concerned about the euro before, but they are back buying now. The share of UK buyers is up, especially bank treasuries, and central banks accounted for as much as 68% of buyers on our US dollar issues, which is a very strong signal.

The longer term trend is a little different; we are moving from a position a few years ago where one-third of issuance went to each group – bank treasuries, central banks and institutional investors. Now banks are more like 40%, and fund managers are a bit less. But we have not decreased the duration as a result, which suggests that bank treasuries are now pushing their duration, perhaps to get the yield pick-up.

Ms Laurent: Our investor base has not changed radically. Rather, there has been an incremental strengthening of trends noted over the past few years. Prime among these is the increased demand from bank treasuries, with their regulatory requirement to hold high-quality liquid assets, and US dollar benchmark placement is now more evenly split between central banks and banks. 

While Asian demand remains strong, we have noted the growing share of our placement to South American institutional investors. Perhaps the most interesting change for us was witnessed with our more liquid Green Bond issuance, where the predominant demand was from US asset managers, who have otherwise been less focused on a name with 'European' in the title.

Mr de Ruijter: Familiarity with FMO, which is still a relatively new name in the SSA space, has increased significantly during the past year because of our public issuance activity. This has resulted in many new investors opening credit lines for FMO. More specifically, the composition has changed as FMO completed its inaugural euro-denominated benchmark. This was a Sustainability Bond linked to financing green and inclusive finance projects for which the appetite was overwhelming. This led to an expansion of FMO’s investor base with euro investors and particularly socially responsible investor mandates, which FMO considers important as we share similar values.

Mr Gupta: Both US dollar transactions OKB issued in 2013 – the May 2018 and the December 2016 – have shown the traditional pattern regarding our investor base, namely central banks and official institutions ranking first with about 60% and 70%, respectively, of the distribution. Whereas Asian investors have always been keen buyers of OKB paper, we noticed slightly lower participation from the Middle East in comparison with past transactions.

Mr Klimaszewski: One of the main tasks formulated in our debt management strategy is the constant broadening of our investor base, in terms of geographical and institutional structure. In recent years we have noticed a growing interest in our credit from central banks and official financial institutions all over the world. We also offered tailor-made instruments in order to reach particular investor groups, such as schuldschein [German law tradable loans] or retail samurais [yen-denominated bonds]. Last year we continued to conduct our extensive marketing activities and visited new locations for the first time. Interestingly, it turned out that investors we met there already had exposure to Polish local bonds.

Q: What are your likely funding needs for 2014, and would you raise money beyond your needs?

Ms Kreivi: A funding target of €70bn was announced to the market, allowing the option of pre-funding if we complete the programme early, as we did last year.

Mr Fayolle: As stated in the Budget Law, the funding programme for 2014 amounts to €173bn of medium- and long-term debt issuance, net of buy-backs. This includes approximately 10% of inflation-linked bonds. This amount will not change, as we consider the predictability of the medium- and long-term issuance policy a key commitment of Agence France Trésor to the investor community. 

Mr de Ruijter: We intend to raise between €1bn and €1.2bn in funding during 2014. This is in line with the typical annual funding needs of FMO. The main drivers of our funding needs are the growth of our investment portfolio and repayments of existing funding. 

Mr Noël: As in 2013, we are targeting €15bn to €18bn of long-term paper, plus the roll of commercial paper amounting to another €10bn. We have room for about 20% of that to be in private placements, floaters and structured notes. In 2013 we only had 6% through these diversification tools, but it always depends on cost efficiency, on the swap rates between markets.

Mr Klimaszewski: Our borrowing needs for 2014 are about 25bn zloty [$8.26bn] lower than in 2013 – 133bn zloty versus 157bn zloty. We have lower net needs and fewer redemptions of bonds issued in the domestic market. The latter is the result of improvement in the structure of our debt – extending average maturity of local debt and reduced issuance of debt instruments with shorter maturities.

Initially, the Ministry of Finance expected to complete the first quarter with 50% funded, but the good market sentiment at the beginning of the year and strong demand for our bonds allowed us to achieve this goal much earlier. These developments give us a lot of comfort and flexibility for the remainder of the year and our plans (including prefinancing of the following year) will depend on current developments in our local debt market as well as in global markets – we can afford to wait and see.

Mr Gupta: OKB’s funding requirement is mainly driven by asset and liability management in terms of the size and tenor of its issues. This year’s bond redemptions will amount to the equivalent of €4.6bn which is less than in 2013. We are also aware that our funding programme should respect maintaining a balanced maturity profile. As in previous years, OKB will look to issue one to two benchmark-sized transactions where we will mainly look to the US dollar market and possibly also to the Swiss franc and euro. Together with private placement issuance, that should bring us to a sum of €3bn to €4bn equivalent.

Ms Laurent: We expect to raise approximately €6bn of medium- to long-term issuance in 2014. Our projected financing needs are generally conservative, and therefore while pre-funding for the following year cannot be ruled out, it is unlikely.

Q: What currency mix do you use for your financing?

Ms Kreivi: We do not have a fixed target for our currency mix, but approximately 90% of funding is typically raised in euros, dollars and sterling. We combine issuance of large and liquid benchmark bonds in the core currencies with targeted and tailor-made issuance across currencies. Aided by this strategy, we achieved one of our largest funding programmes ever, €72.1bn, in 2013.

In 2013, 49% was raised in euros, 30% in dollars and 13% in sterling. The remaining 8% was raised in 12 other currencies; the largest were Norwegian krone, South African rand and Swiss francs.

Mr Noël: As usual, we will target 60% to 65% in euros and about 30% in US dollars. We issued no sterling last year, but we have already issued one sterling tranche this year. We will try to diversify a bit more this year to sterling or even yen if the swaps market pricing is good enough.

Mr Gupta: US dollars in global bond format is our main focus, nevertheless OKB has the option of tapping various other currencies, be it for a strategic or more opportunistic reasons – as we have done this year with our Swiss franc and sterling issues. In the past we took advantage of the Australian dollar Kangaroo market demand, an outing we could also consider after several years of absence. We will also be mindful of moves in the cross-currency basis.

Ms Laurent: We have no preconceived currency mix for issuance, but if the past few years are predictive, we would expect to issue approximately 50% to 75% in US dollars (predominantly through benchmark issuance), a modest 5% to 10% in euro, and the remainder in a host of exotic currencies, as well as more traditional currencies such as sterling and the Australian dollar.

Mr Klimaszewski: The majority of our borrowing needs are funded in local markets. Issuance of zloty-denominated bonds and bills accounts for roughly three-quarters of our total fund-raising program. The local currency market is well developed and highly liquid and demand for new benchmarks sold at auction is proved by high bid-to-cover ratios. We are also a regular issuer of benchmark-sized bonds on euro (due to its proximity) and US dollar (due to its depth) markets. Besides, we do issue in Swiss franc and Japanese yen markets – however, in those cases the amounts raised are not significant. We are also considering broadening of our investor base by issuing in other currencies, but any final decisions on that front will be taken after further cost-benefit analyses.

Q: Do you expect that regulatory changes for banks and insurers will affect the secondary market liquidity for your bonds?

Mr de Ruijter: We expect continued appetite from bank treasuries for our paper, driven in part by regulations to build their liquidity buffers. Insurers typically look for longer dated paper whereas FMO is more focused on intermediate tenors.

Mr Gupta: The regulatory changes regarding capital charges, leverage ratio and liquidity provisions could have significant effects on investments in certain asset classes. Different categories of banks will be affected by varying costs, namely depending on the respective structure of their balance sheet. OKB believes it is still early to assess how the implementation of the final rules will affect banks’ trading capabilities and how the perception of liquidity in highly liquid assets will actually turn out. It is also worth mentioning in this respect that OKB is not funding via covered bonds.

Mr Klimaszewski: Liquidity in our domestic market is relatively high. A few years ago we introduced some measures to improve liquidity, such as changes in our Primary Dealership system. Now we evaluate primary dealers based on the quality of quoting they provide as market makers; the tighter the bid-ask spread and higher size quoted, the better. And this combined with transparency (quotes are available in real-time) proved to be quite effective in increasing liquidity. Basically, firm prices (for big sizes) for almost all outstanding bonds are out there all the time, except for really significant disturbances in financial markets. Regulatory changes have to be followed carefully and their potential adverse impact needs to be addressed properly – however, we have not yet witnessed any in our domestic market. 

Ms Kreivi: Generally speaking, we have so far not observed any deterioration in the liquidity of our bonds. Turnover ratios, bid-ask spreads or volatility have remained solid or even improved, in line with the overall tone in the SSA market. Of course, we monitor regulatory developments very closely and so far, EU and US rules seem likely to continue to recognise EIB’s outstanding credit quality and robust business model. The capital treatment of holding EIB bonds is similar to best-quality sovereign bonds, and similar rules are contemplated in Solvency II (insurance). EU and US liquidity rules are evolving, but we see no sign so far that EIB bonds would not be in the best liquidity category. Many regulatory developments are still work in progress and frameworks for banks’ capital or leverage treatment or indeed fiscal measures could have an impact on the liquidity of the market as a whole.  

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter