A splash of CEE issuances hit the market last week and it’s definitely worth our while to explore the implied valuations recorded on these transactions. In our view, the focus of CEE interest was on ROMANI€ placement last Tuesday (8Y at 5.326% YTM and 13Y at 5.686% YTM), so we’re going to pay extra attention to this particular placement. But let’s take the story from the very beginning.
Romania managed to collect a total of 8bn USD this year prior to Tuesday’s funding, mostly through the USD placement because of around 100bps cheaper cost. Tuesday’s dual tranche collected another 3.2bn EUR, raising this year’s funding level to 10.6bn EUR. Speaking about German paper and G-spread, the 8Y was placed at DBR 0 02/15/2032€+288.5bps (1.8bn EUR placement versus 3.5bn EUR book, implying a 1.94 bid-to-cover), while the 13Y floated at DBR 4 01/04/2037€+308.2bps (1.4bn EUR placement versus 2.9bn EUR book, implying a 2.07 bid-to-cover). Here’s the fun part – Finance Minister Marcel Ciolacu said that they plan a total net 2024 issuance between 8.5bn EUR and 9.5bn EUR, meaning that this syndication might be the last one this year. We beg to differ since several rounds of election spell public wage and pension hikes, meaning that fiscal largesse might bring one more bond placement into the game in the second half this year.
However, the main question is did these prospects for stronger fiscal spending this year prompt financial markets to ask for a bigger premium from ROMANI€? Well, the short answer is – no, they didn’t. Junior traders might be amazed by this observation, but the veterans know how the game works – low volatility and a good run on equities meant that the risk premium on HY was fading away, opening up a window of opportunity for the Romanian Ministry of Finance to get some extra funding cheaper than a few months ago. Check out how the premium to Germany on the existing ROMANI 2 01/28/2032€ shrank significantly this year from about B+360bps to about B+280bps:
Naturally, the Ministry of Finance is definitely going to interpret this move as a vote of confidence in global financial markets, however be mindful that this has got more to do with the direction of global risky assets (equities and HY) than idiosyncratic factors such as fiscal policy. Ask yourself – if FED decides to hold interest rates higher for longer and SPX takes a nosedive, do you think that global markets will give another favorable vote of confidence to ROMANI€? Pay attention that this is not a move we anticipate, but rather a scenario we try to highlight in order to make our readers mindful of the risks they are carrying on their balance sheets.
A more important question we need to ask ourselves is – where are these bonds trading now? With a bid-to-cover on ROMANI€ close to 2.0x, you can expect the paper to trade slightly wider compared to when issued, and you would be completely correct. So, ROMANI 5.25 05/30/2032€ is traded at DBR 0 02/15/2032€+290bps, while ROMANI 5.625 05/30/2037€ is traded at DBR 0 02/15/2037€+310bps, meaning that both are a tad wider. We don’t see a big selling pressure coming from anywhere, meaning that the hedge funds might have been sitting this one through. Time will tell.
The chart submitted above and the sentiment from the markets might be telling us that after a spread tightening of this magnitude, spreads to benchmark might have only one way to go, but we caution against taking these one-sided views. Several bulge bracket banks have been advocating in favor of opening up carry-positive trades throughout the summer because we might see a season of low volatility taking hold until Jackson Hole (August 22nd-24th). Nevertheless, banks are cheering for positive carry/low duration trades, so it’s a question of how does this fit in the overall strategy (we have 8Y and 13Y placement). What we do see on the Street is that our investors are not scared of duration anymore and it seems that very few are taking the possibility of introducing additional rate hikes in the US very seriously. Could be that the recent move north of the benchmark curve might have been the hike markets have been looking for and the FED needs not to do anything in addition?
Again – time will tell.
