Europe's Debt Chiefs Tailor Bond Sales as Banks Cool on Markets

  • Smaller auctions, more sales via banks, new maturities offered
  • `DMOs increasingly taking risks,' Portuguese agency head says

As bond markets get tougher for banks to make money, debt management chiefs across Europe have a new sales pitch: whatever you want, when you want.

Primary dealers, the market-makers who buy securities directly from governments, are getting more picky in what they will buy. So sovereign issuers are experimenting with new maturities, smaller auctions and liquidity-boosting measures, while some are consulting more with investors before going ahead with syndicated offerings.

Italy’s Finance Ministry sold its first new 20-year bond via banks on Tuesday, breaking away from traditional 15- and 30-year debt. France had to wait months before investors were ready to buy its 50-year securities. The U.K.’s Debt Management Office unveiled changes to increase flexibility as primary dealers find it harder to resell to customers quickly.

“The sovereign debt market is more prone to liquidity dry-ups or runs than in the past,” said Cristina Casalinho, the chief of Portugal’s debt agency IGCP, which is holding smaller and more frequent auctions than in 2015 and relying more on sales via banks. “DMOs are increasingly taking risks,” she said.

Getting Creative

As the European Central Bank buys securities to channel money into the euro region’s economy, prices in the “choppy” secondary market are less reliable as a gauge for primary dealing, Casalinho said. Issuers are forced to be adept at managing liquidity and go further to cater to investors, she said by e-mail.

Banks already have been withdrawing. Last year, Credit Suisse Group AG retired as a primary dealer across Europe. Since then, ING Groep NV dropped out of the role for Irish government debt and Societe Generale SA quit the U.K. market citing regulatory changes.

“On the back of a more choppy market, challenging regulation and proliferation of electronic trading, primary dealers find more difficult to comply with obligations, for example: secondary-market quotation requirements and participation in auctions,” Casalinho said.

Debt offices are responding to the pressures on banks. France has said it’s listening to its investors when deciding what to issue and when. The Italian Finance Ministry said its 20-year debt sale came after “thorough market analysis.”

For Portugal, the euro region’s worst-performing bond market this year through April 18, talks with primary dealers and other investors at roadshows is increasingly driving the choice of bonds, Casalinho said. Earlier this month, the country sold 10- and 30-year bonds via syndications, though it coincided with a selloff in higher-yielding debt. Portugal’s 10-year securities yielded 3.10 percent as of 7:38 a.m. London time.

French Patience

France illustrated flexibility last week when the country sold bonds via banks for the first time since June 2014, including 50-year securities.

Anthony Requin, the chief executive officer of debt manager Agence France Tresor, said it postponed issuing the ultra-long security in 2015 because demand wasn’t there. Previous French 50-year sales were in 2005 and 2010. April proved to be a small window of opportunity, Requin said in an interview.

“Obviously January and February were a bit hectic in markets and it was difficult in a volatile environment to execute such a transaction,” he said. “Things started to be clearer in March and the beginning of April now there were no longer uncertainties about decisions from central banks, at least in the short term.”

Spanish Tap

A Spanish Treasury official said last week that they were also considering offering more 50-year bonds and index-linked debt in response to investors. 

More work is also being done to ease liquidity demands on banks such as setting up securities-lending facilities, Casalinho said. To reduce the risk of not being able to refinance debt, sovereign sellers including Portugal and Italy are also finding it easier to exchange bonds into other maturities or buy them back.

“Coupling predictability with flexibility, which is a DMO mantra, has been gathering increasing resonance and accuracy in recent times,” Casalinho said.

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