Fifty-year bonds are France’s sweet spot
The French government rang in the new year with a blockbuster half-century bond. But its fundraising chief says blowout orderbooks for ultra long-dated bonds must be taken with a pinch of salt.
The French have a habit of ringing in the new year with blockbuster deals. The government’s €7bn green bond in January 2017 became the asset class’s first sovereign benchmark. Just two years later, a couple of BNP Paribas deals took the senior non-preferred segment to new heights. And in 2021, Agence France Trésor (AFT) pulled off a record-breaking €7bn sale of 50-year notes.
Since rock-bottom interest rates took hold in Europe during 2016, government issuers have sought to lock in low coupons via ultra long-dated bonds. But France’s debt management office has been at it much longer, issuing a half-century OAT (as their government bonds are called) around every five years. “That is a policy,” says Anthony Requin, AFT’s chief executive. “France was the first country in Europe to issue this maturity in 2005 and we found there was specific demand for this benchmark, particularly among pension funds.”
Attune to France’s issuance schedule — and knowing the last 50-year OAT was in 2016 — the market started sending signals to AFT last autumn that it was ready for longer-term maturities. “After some exchanges with investors in October and November, it was clear there was real appetite for this specific tenor,” says Mr Requin. That interest was not driven solely by the hunt for yield, but also so-called positive convexity. This characteristic of long-dated fixed government bonds means their upside potential for investors, associated with rates falling, is greater than the downside risks of a rates increase.
France’s 2021 funding programme committed AFT to consider a 50-year OAT sometime this year, but conditions during the first weeks were so promising that the decision was made to go early. “The feedback that we received from our lead managers was that the market was very buoyant and conducive to this transaction, that it was expected and we had to seize this window of opportunity,” he says.
Strong vindication
Back in 2016, appetite for AFT’s 50-year deal was hampered by investors’ lack of conviction that very low interest rates were here to stay. To ensure it got the volume it needed, it split that issuance into 20-year and 50-year tranches. “[But] this time it was completely different,” says Mr Requin. “Since December we were convinced that there was no need to do a dual tranche transaction.”
The feedback that we received from our lead managers was that the market was very buoyant and conducive to this transaction
This confidence was vindicated one month later. At 9am on Tuesday January 19, AFT launched its 0.5% notes at 9 basis points (bps) over the trading price of its 2016 deal. It closed two hours later, after pricing was tightened by 2bps. The deal attracted some €75bn in orders from more than 400 investors and achieved a yield of 0.593% — all three figures represent a record level of demand for 50-year OATs. Investors from France and Germany collectively took more than half the notes, with asset managers and insurers leading the way. Lead managers were BNP Paribas, Deutsche Bank, HSBC, JPMorgan and Société Générale.
100-year scepticism
Perhaps the deal’s most eye-popping feature is the fact it was more than 10 times oversubscribed. But Mr Requin warns against reading too much into the ballooning order books for long-dated sovereign bonds. “In no way was there €75bn of true, real money investors demand on the 50-year point,” he says. Hedge funds, for instance, often leave big orders for long-dated government bonds, knowing they will receive a tiny allocation. “This is a bit of an unfortunate dynamic because at some point it risks creating undue confidence about the capacity to issue big amounts of ultra long bonds,” he adds.
It follows that the huge volume of orders placed for eurozone governments’ long-dated debt has not tempted AFT to lock in low coupons for even longer. Mr Requin insists the agency has no intention of following in the footsteps of Austria, Belgium and Ireland by issuing a 100-year OAT. “We have looked at that, of course, and we have been proposed this maturity. But our analysis suggests there is no real structural and regular demand for a 100-year point in our curve,” he says.
AFT’s analysis revealed a high risk that issuing a century bond could destroy liquidity for its 50-year OATs. “We are building a sovereign curve with liquid points — that is our mantra. We only decide to create new products when we are sure we can offer investors the liquidity they are looking for,” he adds.
On the other hand, 50 years is a useful tenor for modelling cash flows for long-term government projects — particularly those relating to energy transition. In 2021, AFT plans to issue its second green bond with a maturity around 20 years, while continuing to tap its 2017 debut. Combined, the agency expects to issue €15bn in green notes throughout the year. It has no plans, however, to dabble in social bonds. In 2020, France’s social security debt management agency Cades, and its unemployment insurance fund Unédic, entered this latest component of sustainable debt. “The market niche is already covered by those two public issuers,” says Mr Requin.
