ECB Bonus Helps Finland Discover Sweet Spot in Negative Yields

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Finland just became the euro zone’s first sovereign to do a syndicated bond sale at a negative yield. But that’s not the most interesting thing about the sale.

Finland managed to fix the yield to make the note eligible for the European Central Bank’s quantitative easing program, which Mizuho Financial Group Inc. says is “supportive” for the bond. The ECB only accepts debt that yields more than its deposit rate, which is minus 0.4 percent. Finland’s 3 billion euro ($3.34 billion) seven-year note priced at a yield of minus 0.22 percent late on Wednesday.

The choice of maturity is unusual for Finland, but “moving out the curve from the traditional five-year maturity will do the trick to make the bond ECB QE-eligible,” David Schnautz, an analyst at Commerzbank AG, said in a note before the sale. Longer-term debt tends to yield more than shorter notes, unless a yield curve indicates an economy is headed for a recession.

QuickTake Negative Interest Rates

“We did assume the Public Sector Purchase Program eligibility rate limit to affect demand and thus considered the seven-year maturity superior to the more traditional five-year point,” Anu Sammallahti, head of funding at Finland’s State Treasury, told Bloomberg.

The office isn’t planning more syndicated euro deals this year, after completing 75 percent of Finland’s long-term financing, she said. More than 90 investors placed orders for a total of 11 billion euros in Wednesday’s sale, according to the state treasury.

As debt offices across the euro zone design issuance in a way that gives them access to the ECB’s historic bond purchase program, Nordea Bank AB says policy makers in Frankfurt may eventually drop their eligibility constraints. That means issuance patterns may change. But even with the ECB backstopping euro-zone debt, Finland has chosen to take a “cautious” route, according to Jan von Gerich, a fixed-income analyst at Nordea in Helsinki.

“I would have expected them to leave it open, possibly saying a minimum of 3 billion euros, if anything. They usually do at least 4 billion euros,” von Gerich said. “And in the good old times it was 5 billion euros.”