Banks prop up government-backed bonds as low yields bite

Fri Apr 12, 2013 7:49am EDT

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LONDON, April 12 (IFR) - Banks' share of government-backed euro-denominated bonds in the year to date has almost doubled from 2012, Barclays research showed on Friday.

Public records of bonds issued by supranationals, sub-sovereigns and agencies (SSAs) show that banks are now the largest investor class in the sector, taking down 40% of all issuance, versus 21% across all of last year.

The research states that a drive from banks to build up liquidity buffers is contributing to this trend. Those working on the deals, however, say it is also symptomatic of a decline in real money interest in the sector.

"Spreads across the sector have been so much tighter than last year, so there is limited relative value for some of the key real money investors," said one syndicate official.

"As a result, banks have to prop up deals a little bit more."

Spreads have ratcheted in for many of the largest euro issuers since last summer.

The European Financial Stability Facility, for instance, priced a new five-year bond at mid-swaps plus 9bp this week. It last issued a bond in the same maturity in January at mid-swaps plus 17bp, and before that last October at plus 23bp and last July at plus 50bp.

Low returns are making some of the most risk-averse buyers of Triple A rated government bonds look elsewhere.

Around two-thirds of respondents to an RBS survey of 60 central banks this month said they were more inclined to invest in equities than a year ago, while only 25% still voiced a preference for Triple A rated government bonds.

It would appear sub-sovereign issuance is also losing its appeal.

Banks, however, have a natural demand for short-dated liquid assets in order to show regulators they have enough securities to sell if times are bad.

But there is some concern that the Basel Committee's decision in January to include Double A rated RMBS notes and A+ to BBB- rated corporate bonds in their definition of high-quality liquid assets for liquidity coverage purposes could have a detrimental impact on the SSA sector in the medium term.

Observers speculated that bank treasuries might show a preference for higher yielding assets, which as a result would see a decline in the amount of investment in the SSA sector.

The research published by Barclays on Friday shows this has not really materialised yet.

"Banks are generally more conservative in their approach these days, and that's probably why a lot of this money remains parked in SSA bonds," said another syndicate official.

However, there has also been limited alternative high-quality supply, with only some selective low-beta corporate and covered bond issuance so far this year.

SSAs have undoubtedly benefited from this trend, and many of the heaviest users of bond markets are well advanced in their annual funding plans.

Issuers will be cautious, however, about leaning quite so heavily on this one investor group, especially as accounts may now be inclined to look elsewhere if other high-quality alternatives spring up. (Reporting by John Geddie; Editing by Philip Wright, Julian Baker)

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