Defence headlines and swap spreads dent ADB euros
Investors' uncertainty about how Europe is going to fund more military spending, along with swap spreads plunging to record lows, worked against Asian Development Bank's latest euro offering, as the supranational faced shifting goalposts when it came to fair value.
"The market backdrop was impacting some of the demand at the periphery," said a lead on the deal. Some of the so-called fast money accounts that have helped other SSAs post massive order books this year did not participate in the ADB deal, he added.
"The focus has been on the move in swap spreads driven by this defence spending story out of Germany and [discussions around] the debt brake as well," he said.
The 10-year swap spread hit a low of minus 9.5bp, matching the record already reached twice this month. As swap spreads move further into negative territory, the spreads on SSA bonds versus mid-swaps, a common metric for assessing value, widen.
As well as heightened spending, quantitative tightening by the the European Central Bank is also thought to have had a hand in the widening of Bund spreads against swaps by adding to the gross supply that the market has had to take down.
"It was unfortunate in the context of our bookbuilding process," said the lead, "but I'm happy with where we are and the focus that the trade got. ... In the context of that volatility, it was a solid outcome."
Leads BNP Paribas, JP Morgan, NatWest and UBS had seen fair value for the ADB's new bond at 46bp over mid-swaps the day before the trade, but after peers such as the World Bank and the European Investment Bank widened by around 1bp, the assessment of fair value followed to 47bp, leaving the guidance level of swaps plus 48bp offering only 1bp of new issue concession.
Mid-morning UK time, the leads set the final spread on the €1bn bond flat to guidance as they posted an initial book update of €960m. The move gave them some traction with buyers and the book grew from there to €1.1bn by final terms, of which €50m came in the form of joint lead manager orders.
The supranational may have managed to get its 10-year fully subscribed, but the bond was still a sign of how much more difficult the SSA market has become compared to the ecstatic conditions issuers enjoyed earlier in 2025.
Volatility in the secondary market, driven by defence spending expectations, is converging with weaker sentiment in the SSA investor base. That weakness was already apparent from the recent slower deals from regional German SSAs – an issuer segment that often offers the market's tightest spreads.
Bankers reported that the shift in attitude was slight. "There's no real change to the buyer tone," said one senior SSA banker away from Tuesday's SSA benchmarks. "The market goes through waves. It's a bit softer now, but it's marginal."
But the more timid bid along with the defence headlines were apparently enough to make the work of the ADB and its leads a slog on Tuesday. The ADB was the first SSA issuer outside of the regional Germans to show how much demand had softened.
The market is in no way impassable, however, as Spain showed, when it posted €89bn of orders for its new 15-year in its first post-IoI book update on the day. The contrast between the ADB's syndication and Spain's implies investors are picking their buys with more discretion.
Tuesday's euro benchmark from the ADB was also notable for being the first to include UBS as a lead manager, according to IFR. After retreating from the capital-intensive SSA business more than a decade ago, the Swiss bank is looking to return to that part of the fixed-income market.
More euro SSA supply is on the way despite the softer market. The Flemish Community mandated a June 2037 bond as Spain and the ADB cleared their issues. Deutsche Bank, HSBC, ING and UniCredit are running the Belgian region's transaction.