Amid signs in Europe of flagging corporate bond issuance, eurozone governments are on a new roll with planned or actual debt issues – not least in Germany, which on Monday issued only its second foreign currency bond since the second world war in an effort to find investors outside Europe.
In 2005, Germany, Europe’s benchmark issuer of sovereign debt, sold a $5bn five-year bond, the first time it had sold a foreign currency bond since 1945, according to the FT.
Underscoring growing competition among governments for funds in Europe, Germany raised $4bn, following Spain and Belgium, which issued $3.5bn in dollar-denominated paper last week, amid what the FT described as “a crowding-out effect caused by record levels of government debt”.
Eurozone governments are due to issue a record €853bn ($1,247bn) in bonds this year — 29 per cent more than last year — as they attempt to stimulate their economies and pay for bank bail-outs, the FT added.
But Italy’s sale of €2,9bn ($4.2bn) of debt helped drive down European government bonds on Monday, with German bunds snapping a two-day gain, reported Bloomberg. The decline sent the yield on the 10-year bund up from near the lowest level in four months on Monday – even as Ireland, Spain and France, as well as Germany, prepared to sell debt this week.
As the news service noted:
[European] government-bond sales may curtail gains for longer-dated securities this week, WestLB AG said [on Monday]. European nations will offer 20.5 billion euros of bonds, compared with 17 billion euros of interest payments and redemptions.
Italy sold 2014 bonds yielding 2.83 percent [on Monday]. Investors bid for 1.49 times the securities offered, compared with 1.46 times at the previous sale on Aug. 13.
However, adding to the appeal of issuing dollar-denominated bonds for eurozone governments has been a fall in the cost of switching back into euros from the US currency – convenient for European financial institutions as they seek to repay dollar loans and repair balance sheets, the FT notes.
Overall, European issuers have already raised $12.5bn in dollar-denominated bonds this month, according to Dealogic, nearly double the levels of average monthly issuance. As the FT explains, “this demand for dollars has forced down the cost of switching back into euros from dollars in the so-called basis swaps market. This is where a price is set for transferring from one currency to the other”.
The German government saw demand for its three-year bonds rise above $10bn, one banker told the FT. Bank of America Merrill Lynch, Citigroup, Deutsche Bank and HSBC managed the triple A-rated sale, which attracted strong demand from US institutional investors.
This surge of activity in government debt issuance stands in stark contrast to the recent dip in European corporate bond issuance, reported by the FT on Monday. Bond issuance in July declined for the first time since March, by €20bn month on month to €27bn, but bankers “are convinced that it was only seasonal”, the report added.
Related links:
Does a single European bond hold the answer? – FT Alphaville
German bond sale’s fate signals trouble ahead – FT