Only two public sector borrowers opted to venture into the US dollar market on Tuesday, contrasting sharply with the flurry of issuance in the single currency, as a mixed outcome for recent US dollar deals has led market participants to pause for thought.
KfW led the charge with a US$4bn five-year transaction, a tenor also picked by the Asian Infrastructure Investment Bank for a US$2bn sustainable development bond. The pace was at odds with the deluge of transactions in euros. Five new issues were due to price on Tuesday with a further six slated to print on Wednesday.
“A lot of issuers that are coming were thinking about doing US dollars but switched to euros because that feels much deeper as a market right now," a head of SSA DCM said. "You get access to a range of maturities, which you don’t in US dollars. EDC, the World Bank were all thinking about dollars but opted for euros instead. This genuinely feels like one of the busiest markets we’ve ever had.”
While EIB's US$15.4bn-plus book last week was its largest even for one of its US dollar Globals and the Asian Development was also rewarded with bumper orders for a dual-tranche three and 10-year trade, a US$2bn transaction for the Inter-American Development Bank that was just covered despite coming 2bp wider than EIB shook confidence in the market.
"The IDB trade wasn't that great and I cannot really pinpoint why demand wasn't as strong as expected," another head of SSA DCM said. "Level-wise they did everything right and somehow it didn't quite achieve expectations. And now we're seeing KfW follow but they're coming wider than EIB."
Leads Bank of America, Citigroup and RBC started marketing the German agency's trade at 42bp area over SOFR mid-swaps, landing it 2bp tighter on books over US$11.7bn. At 40bp, this was 1bp back of where EIB priced its slightly bigger US$5bn last week.
"That gives you the signal that everyone is seeing the same complications in dollars," the second banker said. "Nevertheless, KfW got US$10bn-plus, so it's not a bad result for them. I don't think unloved is the right word but I think there's some confusion around how strong US dollars really is right now. It's unusual to see World Bank, EDC come to euros at the same time rather than doing dollar trades, we're not used to this. It shows something is a bit off. "
A key US inflation data point to be released on Thursday is likely to be playing on investors' minds, given that it will give a much clearer direction as to what direction the Fed's next steps in terms of rate hikes will be.
“From an issuer’s perspective, everyone is desperate to raise money while they can," the first banker said. "We think that’s sensible given that we don’t know how long it will last. All these weeks are getting more and more compressed. There’s US CPI data on Thursday, so people are conscious of getting ahead of that. We’re also advising issuers not to go head-to-head in the same maturity. There's definitely a first-mover advantage.”
Top tier versus second tier
There is also a clear advantage in being among the most coveted Triple A name, as the spread difference between KfW and AIIB showed. At 64bp over SOFR mid-swaps, the Asian supranational was coming 24bp wide of the German agency. Still, a book of over US$2.6bn meant that leads BMO, HSBC, JP Morgan and TD were able to move the level by 1bp from IPTs.
"Last year, the differential between the two names was only 15bp," the second banker said. "There is a trend to widening in spreads between top-tier Triple A SSAs and slightly second-tier Triple A SSAs and the rest. Just look at CDC, they used to be pretty much in line with the top supras, they're now 5bp back of the top names. It's the same for an issuer like AfDB. So there is a trend to make a larger distinction between names."
For Kommunalbanken, which is marketing a five-year at 58bp area via Citigroup, HSBC, JP Morgan and RBC, that means a marketing level that is 18bp back of where KfW is landing.
In three-year, France's Aa2/AA/AA rated Caisse des Depots et Consignations is marketing a US$1bn trade at 46bp area over via Barclays, BNP Paribas, JP Morgan, Morgan Stanley and Nomura, while Austria's Triple A rated Oesterreichische Kontrollbank is some 7bp inside at 39bp area over for the same deal size via Barclays, Citigroup, Goldman Sachs and HSBC.