German 30y draws big orderbook
Syndicated sovereign supply has arrived in large size today as Germany taps €3bn 30y at Bunds +7.5bps through Deutsche Bank, JP Morgan (B&D), Morgan Stanley, NatWest and Nomura. The latest orderbook size for the €3bn supply is reported to be above €33bn which compares to €41bn for the previous tap of €4bn in February.
The deal was announced on Monday and long-end curves have seen a modest steepening since then. One trader described the reaction across the curve as “pretty contained”. For instance, the euro 10s/30s swap was last at -35.5bps (+0.25bp) having been marked around -37bps before news of the syndication hit the screens yesterday.
“It wasn’t really a big surprise as they had been planning an ultra-long syndication for the second half of this year,” one dealer pointed out.
A different market participant felt that today’s deal had gone well and reported the bond traded 5-12 cents over the re-offer price prior to pricing. “There was a little bit of cheapening in advance of the syndication being announced and a nice concession ahead of the pricing. I think most participants will be happy with it,” he said.
More generally, the reception for the 30y Bund syndication is being watched by analysts keen to assess investor appetite for duration in the absence of a QE bid and against the backdrop of recent hawkish central bank comments. The decent-sized orderbook could be a sign that investors are terming-out duration as higher-for-longer becomes a new reality.
“There’s a lot of debate at the moment about whether we’ve hit peak rates and for dealers this debate is significant because of how we run our books. Whether or not the ECB hikes by another 25bps has an impact for us,” said one euro dealer. “But for investors it’s different. They have the opportunity to get some great levels compared to where the market has been in recent years. Rates could end up going up by another 50-100bps but from a historical perspective, if you can average in these sort of yields, then it’s not a bad level to be getting some risk on the books,” he pointed out.
Ahead, other candidates for sovereign syndications include Italy with banks slating a possible 10y BTP alongside a BTP Italia or Futura, Portugal having reported in its Q3 funding outlook that it is considering a syndication during H2, and Austria.
SSA appetite lukewarm as EU next big test
Unlike Germany’s latest deal, the reception for SSA issuance has been lukewarm since markets re-opened. Last week EFSF tapped €1bn 2026s with €2.2bn orders and sold €2bn new 15y bonds with an orderbook of €8.4bn.
One seasoned dealer described the dual tranche as “respectable but not blockbuster” and added that the timing was not great, “I think people were still in vacation mode and not really switched on for new issues. Plus the pricing coincided with a market spike on weak PMI data and people got easily distracted,” he said.
Already, some argue that new issue pricing needs to become more attractive to lure back investors, “The EFSF deal wasn’t great value. New issue discounts have to return to the market - maybe it will happen,” said the above dealer.
As for how soon that will occur, he suggested that a cyclical pattern typically plays out, "Generally, new issues tend to get absorbed just fine and then perform. We see syndication desks tighten the pricing gradually. Then you have a couple of issues that get over-priced and people get hurt and complain. So then the discounts start to re-appear again and the cycle continues.”
The next big test for the SSA market will likely be the EU’s first syndication after the summer break scheduled for the week of 11 September. At the start of this year, during the seasonal supply glut in Q1, the EU was still drawing bumper-sized order books.
Still, with most issuers already 80%-plus completed on their 2023 borrowing needs (e.g. KfW 80%, EU 85% and EIB 92%) the final wave of supply in Q4 could yet be adequately absorbed and markets may have to wait until January to get a real sense of demand under the new post-QE, higher rate regime.