The European Financial Stability Facility kicked off what is expected to be a hectic week of supply with a dual-tranche offering on Monday, the €6bn transaction slashing through a large chunk of its 2023 funding programme.
The supranational's trade was more or less wrapped up by the time Cades, the Council of European Development Bank, Latvia, Societe du Grand Paris and Belgium had announced their plans to come to market.
"The trend is very clear: for those issuers willing to pay a decent concession, investors are here," said a head of SSA syndicate. "Look at EIB and KfW last week. The deals went well, and it's the same with EFSF today."
EIB had more than €22.5bn of orders for a €5bn 10-year EARN last week, while KfW priced a record-breaking €6bn March 2028 on a €19.5bn book.
In keeping with the strategy adopted by the vast majority of public sector issuers since the start of 2023, EFSF offered around 5bp of concession at starting guidance of less 22bp area for the €2bn August 2026 and plus 8bp area for the €4bn 10-year. It landed 2bp tighter on both tranches on books in excess of €5bn and €11.4bn, respectively, via Goldman Sachs, JP Morgan and UniCredit. The 10-year was in line with EIB's pricing the previous week despite EFSF being slightly lower rated at Aaa/AA/AA.
"They paid the right concession, although it'll be interesting to see how it performs given that it's a chunky size," the head of SSA syndicate said. "Taking €4bn out of an €11bn book feels ambitious when EIB did €5bn out of €22bn."
The transaction's size surprised some market participants to the upside, given that EFSF only needs €20bn in 2023 while ESM will raise €8bn, though some said it was to be expected that issuers will take as much as they can if markets are good.
"It's almost half the programme!" another SSA syndicate head said. "I think there are two things at play here: the amount of sovereign supply the market is expecting and also the amount of supply from the EU, which you can more or less stick into the sovereign bucket too. Conditions right now are supportive, we've opened up with a reasonable backdrop in terms of outlook vis-a-vis inflation et cetera. But there's still a lot of wood to chop in terms of data to be printed, so everyone is taking advantage of the good window to get trades done."
Raining bonds
Citigroup analysts at the end of last year predicted some €267bn–€426bn of net European government bond supply, up from €96bn in 2022, and another €168bn–€209bn from other SSAs, from €131bn, under different ECB QT scenarios. The European Union will raise €80bn of net supply in the first half of 2023. "It's raining EU bonds," the second syndicate head said.
The supranational sold €4.681bn via auction on Monday, short of the €5bn maximum target, split between €2.796bn and €1.885bn for the July 2025 and July 2041 maturities, respectively, on relatively low bid-to-cover ratios of just under 1.40 and 1.22.
Still, while this is weighing on investors' minds and it is hard for top-tier issuers to price very far away from the European Union, other dynamics at play in making public sector issuers' jobs a little easier. Bankers say investors have a lot of cash to work, which helps dynamics. Furthermore, the move in swap spreads is helping.
"Swap spreads had to tighten and as a consequence we've seen mid-swaps levels widen in sympathy, and that's brought some investors back," the second banker said. "To put it simply, there's fixed income again, there's a lot to be said for that. So we're seeing a much broader base of investors."
A third banker said, depending on names and maturities, the adjustment since the end of last year was around 10bp–15bp.
Bankers have pointed to the high participation from Asian accounts in some SSA deals. KfW, for example, saw 35% of its trade sold into the region. The more attractive levels over mid-swaps have also brought some bank treasuries back after they pulled back in 2022. Some 39% of Austria's 10-year last week was sold into those accounts.
"Bank treasuries really stood out to me there," the third banker said. "I think that credit spread adjustment is a big part of it."
It is not plain sailing for all issuers, however. Rentenbank found its trade wanting for the second week in a row, this time with a €500m tap of its €1.75bn 0.375% February 2028. It came at less 12bp via Danske Bank, DekaBank, Morgan Stanley and NatWest Markets. There was no book update. A €325m November 2029 tap last week followed the same script, pricing at less 10bp, in line with guidance, with no book update.