Public sector borrowers flood market after taper respite
* Highest weekly syndicated volumes since May
* Yield compression thwarts tighter sales
* Issuers round off yearly funding in volatile markets
By John Geddie
LONDON, Sept 27 (IFR) - Sovereign, supranational and agency (SSA) borrowers, keen to avoid more volatile conditions that may lie ahead, flooded the market with a dozen new syndicated bond deals in the global benchmark currencies of US dollars, euros and sterling this week.
Despite the threat of the Fed scaling back its asset purchases still hanging over the market, issuers were able to take advantage of the relief rally following last week's taper postponement, and a comfortable victory for German Chancellor Merkel at the polls.
With nearly EUR27bn-equivalent issued, it marks the busiest period for the asset class since the week before Fed Chairman Ben Bernanke first mentioned the idea of gradually reducing its bond-buying programme back in May.
"I'd be surprised if we had a week as busy as this again before the end of the year," said Alex Barnes, head of SSA syndicate at Citigroup, a lead manager on four of the deals.
It was not all plain sailing, however.
The compression in yields that followed the FOMC decision last week made some bankers nervous over the depth of investor demand at these new levels ahead of Tuesday's issuance wave.
10-year Treasury yields had risen by more than 100bp since the FOMC minutes on May 22 raised the spectre of reduced bond purchases, crossing the 3% threshold at the start of this month. Since the taper postponement last week, yields have dropped from 2.74% to 2.63%, according to Tradeweb.
Issuers who were prepared to pay up handsome new issue premiums to compensate for the move in outright rates were rewarded with comfortably subscribed books. Those which got too cute with pricing, however, struggled.
African Development Bank, for instance, came up short of subscription for a new USD1bn 1.625% five-year Global on Wednesday. The deal priced at mid-swaps plus 6bp, offering just a 1bp pick-up to its 0.875% March 2018 outstanding.
That deal posed broader questions about investor appetite going forward, with bankers reporting that a number of key accounts - especially Asian central banks - are proving much more difficult to lure into deals.
There was a notable absence, for instance, of central bank participation in Austria's new EUR4bn 1.15% five-year RAGB on Tuesday. Despite final orders reaching EUR5.5bn, only 10% of bonds were allocated to central banks, with 47% of bonds mopped up by banks, likely to consist mainly of its primary dealers.
With the bonds trading 2bp wider to swaps by the end of the week, some observers questioned the strength of the placement.
These deals stand as warning signs to others because, while the market is unlikely to see a repeat of this week's issuance flood, borrowers have yet to complete their funding programmes for the year.
In US dollars, borrowers such as the World Bank, the International Finance Corporation, the Council of Europe, and German agency Rentenbank are all rumoured to be looking at deals, while in euros, although the pipeline is thinner, the European Stability Mechanism's inaugural bond issue in October will be under close scrutiny.
Next week is likely to see a drastic reduction in supply, with holidays in China sidelining some very influential investors, and European market participants preoccupied with the ECB's Governing Council meeting on Wednesday.
The volatility in outright rates is set to ramp up ahead of the US nonfarm payrolls announcement on Friday, as investors try to position themselves to withstand a potential further recovery in the US labour market that will, in turn, throw the tapering debate back to the fore.
"Issuers can clearly see the potential headwinds, and will be pleased to have got a good chunk of their funding done this week," said Kerr Finlayson, SSA syndicate at RBC Capital Markets.
Luckily, many of the sector's frequent borrowers are already well advanced in their programmes, while after recent excursions, some are all but done.
For instance, the European Investment Bank and KBN have now issued 95% of their respective EUR70bn and USD24bn funding programmes after deals this week. (Reporting by John Geddie, editing by Helene Durand and Julian Baker)
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