Bonds of some of Europe’s big public sector issuers that will be key to helping boost economies in the region are recovering as a result of the European Central Bank’s three-year tender.
The European Investment Bank, the banking arm of the European Union and responsible for billions of euros of loans for projects such as improving infrastructure in eastern Europe, has seen its cost of borrowing fall sharply in recent days thanks to the ECB action.
The European Financial Stability Facility, the eurozone rescue fund, and KfW, the German development bank, have also been buoyed by the ECB’s three-year longer-term refinancing operation (LTRO), which saw a record €489bn in loans borrowed by eurozone banks this week.
“Sentiment in the eurozone bond markets has been helped by the ECB’s move as it has steadied the eurozone financial system by enabling smaller banks to gain access to loans,” said Elisabeth Afseth, fixed-income strategist at Evolution Securities.
“They can lock in their funding for three-years using the ECB loans and that has provided stability.”
The EIB, which plans to issue €60bn in bonds next year to pay for development projects in the EU, has seen its five-year yields fall by 58 basis points to 2.14 per cent since the end of November.
EFSF yields have dropped 86bp to 2.24 per cent while KfW has seen its cost of borrowing fall 31bp to 1.67 per cent. “This is significant as the EIB and KfW are important lenders in Europe,” added a trader at a large European bank. “If they can borrow at lower rates, then this aids the economy. The EFSF also has to issue more debt in the new year and will hope to keep its yields as low as possible.”
However, other traders warned that the markets remain fragile and susceptible to a potential sell-off, with worries not far from the surface over how eurozone policymakers will draw up plans for a fiscal compact to deal with profligate, high-spending states.
These public sector issuers are all faced with the dilemma over when to launch bonds in the new year. It could be tempting to issue as early as possible because of the threat of a deepening of the eurozone crisis that would spark a sharp reversal in yields.
These issuers are typically some of the first to raise bonds in a new year. None of them have made hard plans on when to tap the markets because of the deep uncertainty.
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