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Frequent Borrowers: Demand for Euros Buoyed by Receding Political Risk

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It is unusual for the longer tranche in a two-handled benchmark bond issue to be larger than the shorter-dated piece. But that is exactly what happened in July when the European Financial Stability Facility (EFSF), which was established in 2010 to help navigate Europe through the financial crisis, raised €6.5 billion in a dual-tranche transaction. This was subdivided into an eight-year €2.5 billion tranche and a €3.5 billion bond with a 31-year maturity. The longer-dated tranche generated a final order book of more than €6.6 billion, allowing for the borrower to print its largest 30-year deal since 2014 at highly competitive levels.

One of the main drivers of demand for this summer’s longer-dated euro benchmarks was the victory of Emmanuel Macron in the French presidential election in early May. This, twinned with diminishing support for extremist political parties in countries such as the Netherlands and Germany, galvanized activity by frequent borrowers in the euro market throughout the summer.

First off the blocks in the slipstream of the French election was the European Investment Bank (EIB), which in early May generated unprecedented demand of over €9 billion from more than 250 investors for its 15-year €3 billion benchmark. A few days later, France’s Trésor capitalized on robust demand at the long end of the curve when it took the unusual step of issuing a 30-year syndicated government bond (OAT) in the same week as a planned auction. The decision was fully warranted by demand for the benchmark, which exceeded €31 billion.

Beyond politics, foremost among other elements supporting the euro market for frequent borrowers is confidence that monetary policy will remain benign. Investors were reassured on this score in June by the Governing Council of the European Central Bank (ECB), which announced that rates would remain “at their present levels for an extended period of time.” It also said that its net asset purchase program, currently running at €60 billion a month, would run until the end of December 2017, “or beyond, if necessary.”

These drivers, twinned with uncertainty over politics and the outlook for rates in the U.S., have led to an unusually high weighting in euros versus dollars in the funding programs of many of Europe’s top borrowers in 2017. At KfW, for example, euros accounted for 55 percent of issuance in the first half of the year, compared with 38 percent in the same period of 2016. Dollars, meanwhile, contributed 36 percent, versus 47 percent in the first half of 2016.

Another top-rated SSA German borrower, Rentenbank, has also seen a sharp increase in the euro share of its funding program in 2017. “The euro has been the most important currency in the first half of the year and our core funding source for duration, in particular for maturities of seven years and longer,” says Stefan Goebel, Managing Director and Treasurer at Rentenbank’s head office in Frankfurt. Rentenbank has issued euro benchmarks with seven- and 10-year maturities this year, while rising appetite among central banks and asset managers has underpinned continued demand for taps of outstanding bonds with tenors of between seven and 13 years, according to Goebel.

None of this is to underplay the importance of the dollar market, which continues to play an anchor role for frequent borrowers at the shorter end of the curve. “The U.S. dollar plays a major role in our funding activities up to five years,” says Goebel, who says that Rentenbank sees little investor appetite for longer-dated dollar deals at the moment. “Negative Treasury-swap spreads make it difficult to reach our targeted funding levels versus six-month Euribor,” he says. “Nevertheless, we plan to issue a U.S. dollar benchmark later this year.”