January 30, 2018 / 3:34 PM / 10 months ago

European Union makes rare appearance with 2.4 billion euro trade

LONDON (IFR) - Uncertainty has hit sovereign markets this week, but that hasn’t stopped SSA issuers from powering on.

FILE PHOTO - A trader at the Frankfurt stock exchange reacts on morning trading results in Frankfurt, Germany, May 8, 2017. REUTERS/Kai Pfaffenbach

The first big wave of issuance has already passed and more borrowers are hitting the market, albeit the backdrop is becoming jittery.

So far, issuers appear unfazed by movements in the government bond markets, with the yield on 10-year at its highest since December 2015.

The yield on Germany’s benchmark bond has jumped to 0.7% compared with a high of 0.74% at the end of 2015, according to Thomson Reuters. The benchmark yield was 0.42% at the turn of this year.

A banker said that while the rates market has not shown signs of entering a bear market, investors may be keeping a close eye on price action.

“The Bund has hit a level we haven’t seen in a while and I hope it will stabilise here. The next level is 30bp away and that could be brutal,” said the banker.

FADE is in the market with a five-year benchmark, but apart from that issuance is taking place in the seven- and eight-year segment, led by the European Union’s €2.4billion trade.

The European Union is making a rare appearance in the market with a seven-year that so far has drawn books of over €5bn via Barclays, Commerzbank, HSBC and UniCredit.

The spread was set at 23bp through mid-swaps, a tightening of 3bp from guidance. The EU is rated Aaa/AA/AAA/AAA.

A lead noted that the proceeds of the funding operation will be used to refinance Ireland’s European Financial Stability Mechanism loan, which made raising money with a seven-year maturity a deliberate choice.

“Issuers always come with size expectations in mind and €2.4 billion was the maximum they could take for this maturity,” said a lead.

A second lead estimated fair value at less 24bp or less 25bp.

The EU’s 0.625% Nov 2023s are trading at less 24.5bp, according to Tradeweb, and its 1.875% Apr 2024s at less 29.7bp.

“It’s very fairly priced,” said a banker away from the deal.

“It’s a good book and that part of the curve hasn’t been active for a while.”


SFIL chose a somewhat unusual tenor for them - an eight-year - which a lead banker said was the issuer’s decision and could potentially be linked to the rise in yields.

“An eight-year comes with a more interesting yield, maybe 0.8%,” he said.

Following comments by Klaas Knot, president of the Dutch Central Bank, over the weekend that the ECB should clarify when it would end asset purchases, Bund yields rose to the highest level since December 2015.

The spread on SFIL’s deal was set at 20bp over interpolated OATs via BNP Paribas, HSBC, JP Morgan, LBBW and NatWest. Books were over €1.75bn at the last update. The issuer is rated Aa3/AA/AA- (Moody’s/S&P/Fitch).

FADE set the spread for its €1.5 billion deal at 15bp over interpolated Spanish government bonds via BBVA, Citigroup, HSBC and Santander, with books in excess of €2.5 billion. Its ratings are BBB+/A-/A (low) from S&P, Fitch and DBRS.

(This version of the story has been refiled to replace euro symbol in headline)

Reporting by Melissa Song Loong

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