The Dutch State Treasury Agency has responded quickly to increased demand for longer dated bonds to boost liquidity, Edward Russell-Walling reports.

The long end of the bond market is receiving more attention from issuers than it has done for some years.

Among the latest to auction long-dated paper is the Dutch government, whose new 30-year offering in April received a fast (thanks to technology) and eager response.

Only a few months earlier, the Dutch State Treasury Agency (DSTA) announced that, although it would use swaps for a limited lengthening of its maturity profile this year, it would not necessarily create an opening for a 30-year bond.

Recent policy had restricted new issues to three-year and 10-year instruments but that has clearly changed.

Increased investor demand for longer-dated bonds has not gone unnoticed. The agency believes that adding this new point to its yield curve will make Dutch bonds more attractive generally, boosting liquidity across the board.

The whole curve

“If you offer the whole curve – all the flavours – then you serve investors’ tastes better,” says Ron Bruggink, DSTA’s head of money and capital markets. “It allows them to implement different curve strategies. A 30-year bond should stimulate liquidity across the whole curve, because you become a more interesting country to invest in.”

While other sovereign issuers have dipped a toe in, or are contemplating, the 50-year market, the Netherlands is unlikely to follow, at least for the time being. “Fifty is a new point on the curve and you should not extend to it if you don’t have a 30,” Mr Bruggink says. “Ours is a small government that doesn’t have the same borrowing requirements as some other governments, so a 50-year issue is not on the cards for the foreseeable future.”

The DSTA has, however, made an unequivocal promise to build the 30-year product. Since the introduction of the euro, Dutch policy has been to concentrate on large issues, totalling at least €10bn and issued according to a well-publicised calendar. That led to the decision to buy back bonds with small amounts outstanding and to focus solely on three-year and 10-year issues.

“We have a very strong commitment to be active in the 30-year sector over the long term,” Mr Bruggink says. “Our 30-year will have over €10bn outstanding in the next three years.”

The DSTA came to market looking for a minimum of €4bn for its January 2037 Dutch State Loan, with price guidance of 4-7 basis points (bp) over German bunds. ABN AMRO, Credit Suisse First Boston and Fortis Bank advised on the transaction. By the time the book was closed only two hours later, orders worth €17bn had poured in and the spread was set at 4bp. Allocations worth about €5.2bn were made.

Once again, the agency used its Dutch direct auction (DDA) system, with a new twist in the shape of an online bookbuilding facility, allowing the DSTA to monitor bids in real time. This partly accounted for the speed with which the auction was concluded.

“The DDA was developed to involve end investors more in the primary process,” says Mr Bruggink. “Investors can put their bids directly in the book via the primary dealers, which has a good marketing effect.”

Some primary dealers complained that the DDA system allowed investors to play banks off against each other, seeing who would discount their fees the most to get the business. “The competitive process can be hard for banks,” admits Mr Bruggink. “All debt managers are worried about that.”

Performance indicator

In previous years, the DSTA used modified duration in its portfolio as a performance indicator. It has since shifted to a measure of the annual amount exposed to interest rate risk, set at a target rate of 9% of GDP. “To borrow more is to bear too much risk. The minister of finance doesn’t want to face spiralling costs because interest rates went up,” says Mr Bruggink. “But to borrow less than the target – issuing only longer-dated bonds, with less yearly refinancing – is a waste of money.”

The agency plans to borrow about €33bn in the current year. It is a regular visitor to market with its three-year programme and expects to be back with this year’s 10-year offering – courtesy of DDA – sometime in the summer. “Because we did the 30-year, we have had no 10-year issue so far this year,” Mr Bruggink notes. “It will be very interesting to see how it turns out.”

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