The wall of sovereign debt keeps on mounting as countries line up one after another in front of the “masters of the universe“. The abundant liquidity created by the central banks is spilling over into places such as Hungary, Serbia and most recently Romania. How did Romanian debt auction go and what do we make of it? Find out in this brief research piece.
Republic of Finland became the first euro area sovereign to issue a 10Y USD paper in the last six years (the second to last issuance was placed by Kingdom of Belgium back in 2014). Also, this is the first greenback bond placed by the euro area sovereign since the pandemic began.
Why did the Finns prefer USD funding instead of more common local currency? The answer to this question could be found on EURUSD forward curve – a plain vanilla 10Y EURUSD B/S swap gives 1265 pips on the forward leg, implying a 1.2227 forward rate. Once we break down this forward premium into annual parts and use 1.0962 as a spot exchange rate, we can easily calculate that the Finns receive about 1.15% annually from the FX swap alone. Subtract this 1.15% from the USD yield achieved by the Finnish Ministry of Finance on last Wednesday’s auction (0.899%) and you get a synthetic RFGB (euro yield) as low as -0.25%. Still below the 10Y RFGB, regardless of which maturity you take as a benchmark (RFGB 2029 trades at -0.15%, while RFGB 2031 trades at -0.09%). The skill of the Finnish Ministry of Finance could be seen in correctly picking the auction day, which is not an easy task once you take into account that a lot of stars needed to align for the placement to be regarded as a success. It is worth recollecting that just one day earlier the European Investment Bank placed a 10Y USD paper at MS+31bps, while Finnish auction closed 1bps inside EIBs placement. And … oh yeah, the European Investment Bank also decided to fetch some cheap dollar funding for all of the projects it plans to finance in the near future.
Although recent Finnish bond placement might appear as a bit uncommon, it is clearly a point in the right direction that the availability of affordable dollar funding lure some of the sovereigns into tapping a large pool of US investors instead of seeking funding at home.
Romanian debt issuance placed on Tuesday (May 19th) is something the investors were completely accustomed to: a dual EUR tranche composed of a long 5Y (1.3bn EUR) and a 10Y paper (2.0bn EUR) attracted as much as 13bn EUR worth of orders (5bn on the shorter one, 8bn on the longer one). Morning IPTs (5Y: MS+355bps, 10Y: MS+425bps) indicated a lot of juice on the long ones, explaining all of the commotion around this maturity. Clearly, the intention of the leads was to build the orderbook and then to conduct the spread tightening and see where the size of the book goes. By the close of the orderbook the spread versus mid-swap curve was tightened all the way down to MS+305bps/MS+375bps, but the 10Y was still kind off sticking it’s head above the place where it should be on the yield curve. So it was up to the secondary market to iron out the relative cheapness of the ROMANI 3.624 05/26/2030: from the reoffer price of 100.00 and subsequent 3.624% YTM, the bid price went as high as 102.00 (3.38% YTM) by 11:30 CET. Nevertheless, two and a half hours later Romanian finance Minister mentioned the possibility of another FX bond issuance in the near future, taking some of the oomph from the market. The market went down to 101.30-101.70 bid-ask late afternoon, roughly the level where it’s being shown this morning as well.
The 3.3bn EUR issued by Romania on Tuesday is clearly not sufficient to close the 2020 budget hole completely, but it’s certainly a step in the right direction. The Ministry of Finance sees a 6.7% GDP deficit this year (72.5bn RON or roughly 15bn EUR). This figure is based on quite an optimistic GDP forecast: -1.9% YoY real GDP drop, versus -5.0% YoY expected by the IMF in April. On the other hand, when you go to tap the skittish international investors, you don’t show up with your worst case scenario on the term sheets. Instead you display a picture painted with colours of optimism and hope, trying to speed up the process before the investors start asking awkward questions about the assumptions backing these forecasts. Romanian Ministry of Finance expects debt-to-GDP ratio at the end of 2020 to reach 40.9% GDP (from 35.2% GDP a year earlier), but this can easily go up should the GDP drop be deeper than anticipated. Once again, the questions underpinning Romanian debt buildup are not concerned with the current debt stock (which is certainly under EU27 average), but are instead aimed at the trend of borrowing to fund the social needs, inflating the CA deficit in the process.