* Hedge funds and bank traders swamp syndicated bond
* Real money investor demand wanes at low yields
* Opportunists stand to profit from curve flattening
By John Geddie
LONDON, March 28 (IFR) - At first glance, France's almost
twice-subscribed 30-year benchmark looks like a standout deal,
but the high allocation to fast money investors has raised
questions over the true depth of demand at the long-end of the
Distribution statistics show that nearly half of the
EUR4.5bn bond was allocated to banks (33%) - confirmed by
sources as trading desks - and hedge funds (16%), which are
typically influenced by short-term trading strategies.
"France knew they could not have got this kind of book with
just real money investors, they needed time to make it
attractive to other accounts likely to have shorter-term
motives," said one syndicate official close to the deal.
When the deal was first mooted in the Agence France Tresor's
2013 borrowing outlook in December 2012, it was anticipated to
attract plenty of demand from pension and insurance funds that
have a natural need for duration, but had been starved of
The challenge, however, was the low-yield backdrop. France's
new bonds priced at an outright yield of 3.263% - slim pickings
for a deal that matures on 25 May 2045.
From December, and in anticipation of the new supply, the
French curve steepened 14bp between 10 and 30 years, which made
the deal somewhat more attractive for real money accounts, but
crucially grabbed the attention of opportunistic investors on
the look out for the chance to make a quick buck.
Delays to the deal caused by the political headwinds in
Europe further accelerated the steepening, with fast money
interest in the end far outweighing demand from the real money
investors who were initially targeted.
"The steepening got a bit out of hand and suggests they
waited a bit too long and ended up paying too much," added
Many of these opportunistic investors now stand to make
handsome profits if France's curve flattens from these inflated
highs, said bankers.
BIDING ITS TIME
Lead managers on the deal acknowledged that previous
issuance windows for France had been scuppered by political
uncertainty in Italy and Cyprus' debt restructuring, but said
the issuer was right to bide its time.
"We knew the demand was there but it had proved difficult to
find the right window with all the headline risk around," said
Torsten Elling, co-head of rates syndicate at Barclays, one of
the banks managing the deal.
"It was such an important deal not only for France, but for
Europe as a whole, and we needed to get it right."
Leads Barclays, BNP Paribas, Morgan Stanley, RBS and SG CIB
gauged the success of the deal by the impressive final book size
that came just shy of EUR8bn, and by the fact they managed to
print EUR4.5bn from initial expectations of around EUR3bn.
Leads said that the high allocation to bank trading desks
was to fill inventory needs for long-dated paper. France has
been the only European sovereign to issue new bonds with a
maturity of over 15-years this year, and may be the only one for
some time with Italy's 30-year plans now looking ominous until
it has a stable government in place.
"Of course they will not be holding these bonds to maturity,
but they need to service ongoing client demand going forward,"
said Damien Carde, managing director, head of frequent borrower
group DCM at RBS.
Sources said banks would expect to be out of those positions
within the next six to twelve months, but if profit can be had
in France's curve flattening before, they will likely exit
The Tresor said bank participation was in line with previous
syndications. It has been over three years since France last
sold a conventional bond by syndication - a EUR5bn 50-year in
March 2010 - and distribution statistics showed bank
participation was much lower at 19%, and hedge funds just 4% on
You have to go back to 2009 - when France sold its previous
30-year - to find a comparable level of bank participation at
27%, but that was alongside a 67% allocation to real money
The Tresor's regular auction process, restricted to primary
dealers, offers very little insight into end-investor demand.
There are some investors that participated in France's
latest deal that are likely to hold the bonds to maturity,
One of those is Italian asset manager Generali, which
sources said placed an important lead order in the bookbuilding
process that gave the deal early impetus.
Filippo Casagrande, head of fixed income at Generali
Investment Europe, confirmed Generali had participated in the
deal late on Tuesday, adding:
"These bonds allow investors both to implement investment
programmes with specific yield targets, and to match ALM driven
duration needs, especially for the retirement portfolios," he
Insurance and pension funds, like Generali, bought a 20%
share of the deal, while other real-money fund managers were
allocated the remaining 31%.
(Reporting by John Geddie; editing by Julian Baker and Alex