Highest coupon since 2014 for ESM as yields upward march goes on

4 min read
Helene Durand

The European Stability Mechanism inked its highest coupon on a short-dated deal since 2014 on Monday, further illustrating the brutal sell-off that has gripped rates markets in recent weeks.

The European supranational, which made a quick intraday dash into the market, priced a €2bn no-grow June 2027 with a 1% coupon, the highest for a trade in that part of the curve since March 2014, according to IFR data.

"I think the markets are in a much better space now than they have been," a DCM banker said. "On the rates side, you now can at least have a two-way debate whether rates have value or not. There's a lot more that's priced into the curve than there used to be."

The 10-year Bund yield passed the 1% mark earlier this month, the first time it had hit that level since 2015. "Spreads aren't quite there but yields definitely are," the DCM banker said. "This should really help the EIB."

EIB mandated Bank of America, BNP Paribas, JP Morgan and NatWest Markets for a debut Climate Awareness June 2032 EARN expected to emerge as early as Tuesday. "Investors will be getting something around 1.4%, maybe a bit higher, that will feel quite novel for them, and is certainly higher compared to a couple of months ago. But issuers should remember that this confidence around rates is not a given, they shouldn't fall into the trap that it won't get worse."

EIB has not printed a coupon above 1% on a euro benchmark trade with a 10-year tenor since 2014.

On the other side of the coin, spreads are still attractive for issuers. The 25bp through mid-swaps spread at which the ESM transaction priced was a record tight for the issuer in that part of the curve and offered no new issue concession. It was the tight end of the less 22bp area guidance.

"The moves we've seen in swap spreads have made things very interesting," a syndicate banker said. "We've seen the most liquid names like KfW massively outperform the rest of the SSA world. They look very expensive versus Bunds and OATs and are around 50bp through mid-swaps. That tightening hasn't filtered through to other names, so it's still attractive to buy ESM, which also offers a nice pick-up versus EIB."

Commerzbank analysts wrote that their on-the-run 10-year KfW swaps spread was trading at its richest since 2015 last week, leaving the spread differential with Bunds at an all-time high.

"I call this the dollarification of the euro market," the syndicate banker said. "Demand is very much driven by the relative value between SSA names and OATs, Bunds. That's driving central banks' demand."

Market paradox

While the €12.7bn of demand for ESM was far from a record, it was still a very respectable outcome given the transaction priced flat to the issuer's curve.

"There's a real paradox in the market right now," another syndicate banker said. "For years, investors complained that rates were far too low, we were in deep negative territory yet we had huge order books, but the reverse has happened. Clearly, that was due to QE and now investors have had to adjust to a brutal rise in rates."

He said that five-year was an obvious choice for ESM given it did not have an incentive to go long and, with an inverted swaps curve and an attractive spread versus govvies, it was a great spot on the curve.

"While there have been times when conditions have been really tough and difficult to navigate this year, conditions overall are still good," he said. "A deal like ESM clearly shows that investors have plenty of cash, especially given that they haven't been able to deploy it when windows have been shut," the second syndicate banker said. "I think there's a bit of tendency to scare ourselves, but you have to remember, QE isn't stopping in Europe, the ECB trajectory is very different from that of the Fed or Bank of England."

Barclays, Credit Agricole and DZ Bank were lead managers on ESM.