Market Economics | Interest Rate Strategy - BNP PARIBAS ...

EMU Debt Monitor: SSA & Covered Bonds
• The new EU 5y benchmark issued under the
EFSM programme was a great success, with a
final book in excess of EUR 20bn.
• All eyes are likely to be on the upcoming
EFSF bond auction; the inaugural bond is
expected to be launched by the end of the
month.
• STRATEGY: SSA investors looking for
protection in this environment of uncertainty
should switch from EU and EIB into KFW ahead
of the auction (switches in the 7y/10y area at
almost no give-up in ASW space and with
potential for better rolldown).
Chart 1: Core SSA Term Structures (in ASW)
30
20
10
0
-10
-20
-30
EIB
KFW
-40
CADES EU
-50
0y 2y 4y 6y 8y 10y 12y
Source: BNP Paribas
Chart 2: KFW/DBR ASW Differentials
The first week of the year was marked by a new
record supply of EUR benchmark covered bonds
reached in only three days (EUR 18.5bn over the
week). Nonetheless, European SSA left their print
with heavy dollar-denominated supply (USD 12.5bn)
and the impressive performance of the new EU 5y
benchmark launched under the EFSM programme.
The final book was in excess of EUR 20bn (EUR 5bn
was issued) and the bond richened 10bp in the grey
market in a few days.
This week, EUR-denominated supply out of
European SSA picked up, with EUR 8bn having been
issued so far (from EUR 6bn last week), of which
FADE – the new Spanish agency – priced an
inaugural 3y EUR 2bn bond. USD-denominated
supply lost ground, with only USD 3bn coming to the
market.
So far, European SSA have been holding up well
against swaps, with asset swap spread movements
rather contained. The notable exceptions are CADES
and KFW in the 10y area. Indeed, we understand
that CADES suffered again from selling pressures
out of French OATs, while KFW cheapened on the
back of its new 10y benchmark priced on Tuesday
(11 January).
The next key event to watch will be the issuance of
the inaugural EFSF bond, expected towards the end
of the month. If the success of the new EU 5y
benchmark demonstrates investors’ strong appetite
for European debt, it remains to be seen whether the
EFSF will attract as much demand. Indeed, the
success of the new bond is likely to rely on the
comprehension and perception investors have of the
credit enhancements and the structure of guarantee
55
50
45
40
35
30
25
20
15
10
KFW 3.625 20/01/20 ASW - DBR 3.25 04/01/20 09 ASW
KFW 3.875 21/01/19 ASW - DBR 3.75 4/1/19 ASW
KFW 4.125 4/7/17 ASW - DBR 4.25 4/7/17 ASW
Feb 10 Apr 10 Jun 10 Aug 10 Oct 10 Dec 10
Source: BNP Paribas
10
8
6
4
2
0
-2
Chart 3: EIB & EU versus KFW (ASW Diff)
-4
EIB 4.625 15/4/20 ASW - KFW 3.625 20/01/20 ASW
EEC 3.375 10/05/19 ASW - KFW 3.875 21/01/19 ASW
EIB 4.25 15/04/19 ASW - KFW 3.875 21/01/19 ASW
-6
EEC 2.375 22/09/17 ASW - KFW 4.125 4/7/17 ASW
Mar 10 May 10 Jul 10 Sep 10 Nov 10 Jan 11
Source: BNP Paribas
offered by the EFSF, as they tend to be more
complex than other SSA players. On top of that,
market conditions at the time of issuance could add
to the challenge as we will be approaching the end of
a month particularly loaded in terms of supply. We
see the risks of a disappointing auction as an
Camille de Courcel 13 January 2011
Market Mover, Non-Objective Research Section
38
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