In less than a week the first tranche of the new EFSF bond will price.
Excited yet? Perhaps you should be.
As Citi pointed out in a Tuesday note, the debt will effectively act as a proxy for the fiscal state of the eurozone. For what it’s worth, Citi reckons the five-year bond will initially trade at a yield of about 3 per cent, or some 70 basis points over Germany.
And also, close to the European supranational bonds it resembles.
But less than its predecessor, the EFSFM bond.
Why the discrepancy? Here’s Citi’s Peter Goves:
The EFSM makes available €60bn from the European Commission, drawn from the EU budget. A key difference between the forthcoming EFSF bond is that the EFSM is an EU-wide mechanism and can be drawn upon by any member state. The EFSF in contrast is a vehicle (a Luxembourg-registered company) backed by (eurozone) intergovernmental guarantees of €440bn. In order to achieve AAA status, the EA member states guarantee 120% of their allocation for each bond1. What matters from an interest rate strategy perspective is what discount over existing curves investor might require to buy the debt given the uncertainty of the precise mechanics of the EFSF and what its future might hold.
Indeed. So why not ask for that little bit extra to compensate for the risk of you know, a whole bunch of countries pulling out of the EFSF, or whatever.
Which kind of brings us back to the first point.
Once the EFSF bond is priced (next Tuesday) and starts trading, we’ll have a great proxy for how the market views ,the eurozone’s financial health. And also, its unity.
Related links:
Eurozone bond issue nears key demand test – FT
That EFSM bond crowd - FT Alphaville