July 9, 2018 / 2:57 PM / a year ago

Euro members consider more super-long borrowing as ECB mulls bond 'twist'

LONDON (Reuters) - Belgium hopes to sell bonds with super long maturities soon, while bankers say several other euro zone governments and state-linked bodies may follow suit as the European Central Bank mulls pushing long term borrowing rates even lower.

FILE PHOTO: The logo of the European Central Bank (ECB) is pictured outside its headquarters in Frankfurt, Germany, April 26, 2018. REUTERS/Kai Pfaffenbach

Belgian debt agency chief Anne Leclercq told Reuters that the country is planning to sell 40- and 50-year bonds in the near future if current market conditions persist.

“If this window remains, we will certainly reopen the lines in the ultra-long 40- and 50-year part of the curve soon,” Leclercq said.

The ECB is considering buying more long-dated bonds from next year to keep euro zone borrowing costs in check, even after it stops pumping fresh money into the economy, sources told Reuters last month. The proposed plan under discussion is to reinvest the proceeds from coupons and maturing debt already held under the scheme primarily in long-term bonds.

That has pushed down government bond yields at the long-end of the yield curve and fueled speculation that borrowers could use the opportunity to issue more longer-maturity debt.

(GRAPHIC: Getting flatter: Germany's bond yield curve - reut.rs/2L1Rz3q)

Bankers who manage bond sales for European government and government-linked borrowers said they had fielded several inquiries from clients. 

“They have asked about it, especially those who look at the long-end on a regular basis,” said one banker, who asked not to be named as she is not authorized to speak about clients. 

In recent weeks, Slovakia and the German state of North Rhine-Westphalia have sold 50-year bonds for the first time while Austria tapped its ultra-long bonds.

One banker said other German states could follow in the footsteps of North Rhine-Westphalia. 

The euro zone’s bailout fund, the European Financial Stability Facility is also planning a bond this week which, according to bankers, is also likely carry a long tenor.

Bankers added that others such as Ireland were possible candidates.

Ireland already plans to sell between 1 and 1.25 billion euros of 10- and 27-year bonds in a regular auction on Thursday, with the latter being the longest duration debt to be auctioned since last November, when it last tapped the 2045 bond.

It will have raised at least 12.25 billion euros of its 14 to 18 billion issuance target for the year by Thursday, limiting its room for a third syndicated sale this year. In 2016 Dublin made a small issue of 100-year bonds for the first time.

The ECB’s asset-purchase stimulus scheme has provided an opportunity for borrowers in the euro zone to lock in low interest rates for decades into the future - helping to ease servicing costs while reducing the stress of frequent refinancing. 

With total government debt approaching or exceeding annual gross domestic product in some countries, extending the maturity profile of that debt is one way of keeping it sustainable over time.

Spain’s debt-to-GDP ratio, for example, is almost 99 percent compared with around 40 percent in 2008. It has issued a lot of long-term debt in recent years, including a 50-year bond. 

The average maturity of Spanish debt has risen to just over seven years from around five years in 2013.

Italy has also taken advantage of low borrowing costs to extend the average remaining maturity of its debt, which now stands at over seven years. That compares with around 6.5 years at the start of 2015 - when the ECB said it would launch massive stimulus to boost growth and inflation.

(GRAPHIC: Italy and Spain average govt debt maturity - reut.rs/2L0Oxwp)

“As a recurrent issuer of bonds, lengthening the debt portfolio is very important because it stabilizes the interest expenses for several years to come,” the Belgian debt agency’s Leclercq said.

The suggestion that the ECB could reinvest the proceeds from maturing bonds in longer-dated debt is reminiscent of the U.S. Federal Reserve’s Operation Twist last used in 2011. Back then, the Fed had sold short-maturity debt, using the proceeds to buy longer-dated Treasuries.

In the ECB’s case, reinvesting proceeds of maturing debt into the long-end of the government bond yield curve would be aimed at limiting the natural aging of its 2.6 trillion euro ($3 trillion) bond portfolio, along with keeping a lid on long-term bond yields, a determinant of borrowing costs for governments, companies and households.

“There was an element of opportunism about the 50-year issues from last year but there was always the risk they would lack liquidity,” said a second banker, who manages bond sales for European governments. “But the ECB has, in my mind, handed issuers a golden chance to extend those lines.”

Reporting by Ahinav Ramnarayan; Chart by Dhara Ranasinghe; additional reporting by Padraic Halpin in Dublin; Editing by Dhara Ranasinghe and David Stamp

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