March 15, 2019 / 2:21 PM / in a month

Only way is down: strong bid for negative-yielding KfW bond amid rates stasis

* German banks sells 5 bln euros of bonds at -0.267 pct yield

* Euro zone lenders, foreign central banks among buyers

* Deal paves way for other borrowers to do same

By Abhinav Ramnarayan

LONDON, March 15 (Reuters) - German development bank KfW’s 5 billion euro debt sale, at one of the most deeply negative yields on record for such a deal, is a clear sign investors are resigned to several more years of low interest rates in the euro zone, bankers and analysts said.

Triple-A-rated KfW, whose debt is guaranteed by the German government and often seen as a proxy for German Bunds, sold 5 billion euros of three-year bonds via a syndicate of banks on Tuesday at a yield of minus 0.267 percent.

Negative yields have been a feature of the euro zone bond market since the European Central Bank began stimulus measures to aid the bloc’s recovery from the debt crisis of 2010-2012.

But the KfW deal is one of very few benchmark-sized transactions to price at such a deeply negative level.

“Nobody really expects rising rates, given the statements by the ECB and (U.S. Federal Reserve) and given the economic data we currently get,” said Petra Wehlert, head of capital markets at KfW. “Investors live with what they get, and they feel comfortable enough to buy into negative rates at the short end (of the yield curve).

“Investors have to manage their cash, and if there is no change in environment, the risk is limited. KfW bonds are a Bund surrogate, and portfolio managers need to buy liquid securities,” she added, while acknowledging that demand had exceeded KfW’s expectations.

Comparable examples such as the European Investment Bank’s 5 billion euro three-year deal in January 2016 came at the height of the ECB’s now-terminated asset purchase scheme — and yet the yield on that deal was much higher, at minus 0.147 percent.

The fact that KfW was able to price at such a deeply negative yield even after new asset purchases ceased seems to confirm that investors expect the euro zone economy to flat-line for years to come, and that the ECB will be unable to hike rates meaningfully for the foreseeable future.

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Mark Byrne, a syndicate official at TD Securities, which managed the deal alongside BNP Paribas and JP Morgan, said the ECB’s deposit rate of minus 0.40 percent was a clear incentive for banks to invest in such a bond.

But it was not the only reason for the demand, he said: “Not all investors have access to this (deposit facility) — central banks, asset managers and some non-euro zone banks for example. So you must look at their alternative investments.”

He cited the example of three-year German Bunds, trading around minus 0.53 percent, and three-year French government bonds — with a lower credit rating than KfW — trading at minus 0.376 percent.

“So it makes sense (to buy KfW’s bond) if you are a global central bank that needs to hold euros as part of your portfolio,” Byrne said.

As a result, the two biggest types of investor in KfW’s deal were banks, who took 38 percent of the 5 billion euros sold, and central banks, who took 35 percent.

For banks, the deposit rate is a powerful incentive — paying 26 basis points to hold KfW’s debt could be seen as an improvement on paying 40 bps to hold cash at the ECB. Both count towards the regulatory requirement that lenders hold a proportion of assets in liquid and highly rated instruments.

“The high demand from the banks as a sector overall often has to do with regulatory demand,” said Commerzbank rates strategist Rainer Guntermann. “Most investors also suspect the ECB will take some of the supply in the coming weeks.”

Reporting by Abhinav Ramnarayan; Editing by Catherine Evans

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