Public sector borrowers firmly put dollar funding on the back burner last week, as mixed results there left issuers pausing for thought. In euros, meanwhile, positive absolute yields and high supply left little time to pause for breath.
Of the names still showing desire for dollar funding, KfW led the charge last Tuesday 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 following session, three-years proved to be the sweet spot in the public sector US dollar market. Attractive yields helped Oesterreichische Kontrollbank and Caisse des Depots et Consignations gather over US$8.2bn of interest for their US$1bn three-year no-grow trades.
But even including Kommunalbanken's five-year benchmark which priced last Wednesday, the transaction count fell behind the euro market's last week, though bankers said this was in no way a sign of conditions being trickier in dollars.
"The dollar market is great, it's just that euros have gone ballistic," a senior SSA syndicate banker said.
“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.”
Leads Bank of America, Citigroup and RBC started marketing KfW's trade at the 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 deal last week.
"That gives you the signal that everyone is seeing the same complications in dollars," a second head of SSA DCM 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. "
“From an issuer’s perspective, everyone is desperate to raise money while they can," the first head of SSA DCM 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. We’re also advising issuers not to go head-to-head in the same maturity. There's definitely a first-mover advantage.”
Growing gap
There is a clear advantage in being among the most coveted Triple A names, 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 head of SSA DCM 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."
At the last update, books for the Kommunalbanken's five-year had passed US$1.9bn via leads Citigroup, HSBC, JP Morgan and RBC and pricing moved 1bp from the 58bp area IPTs. Those IPTs were 18bp back of where KfW priced its deal in the maturity, another reflection of the growing price gap between issuers. A fourth banker said that differential would have been around 5bp two years ago.
The increasing credit differentiation does mean some price discovery for the smaller issuers, though those willing to start with an attractive spread have been rewarded with strong books, as OeKB's US$1bn three-year showed. Orders had passed US$5.2bn at the last update, enabling leads Barclays, Citigroup, Goldman Sachs and HSBC to tighten the 39bp area IPT level by 4bp. "This year, it is a different year, there should be some price discovery," a lead on the OeKB trade said.
"If you get it right, you get a big book, if you get it wrong, you get nothing," the first banker said. "It's a bit binary, success and failure at the moment."
There were certainly no failures last Wednesday. Even the relatively less familiar CDC managed to pull in over US$3bn of orders to its three-year, allowing for a 4bp revision to a final 42bp pricing level via BNP Paribas, JP Morgan, Morgan Stanley and Nomura.