The diversification options pursued by European sovereigns in recent years have firmly established the inflation-linked sector and the embryonic ultra-long market as viable and increasingly important source of funding.
As the last G7 country to tap the inflation-linked market, now globally worth in excess of US$800bn, Germany's entry has provided diversification to a market already populated by its core European counterparts. France's 50-year conventional issue, meanwhile, has no peer within the euro-zone countries.
Bankers look to the UK market and see the significance of both these sectors in terms of overall funding requirements, but the roundtable attendees that assembled at IFR's offices in London recently were reluctant to extend the UK framework to Europe in the short term.
The UK level of asset and liability management-driven investment arguably does not have a European parallel, and with one participant already describing the OAT55 as the most expensive bond in Europe, it might struggle to find company despite having richened relative to the 30-year.
On the question of arbitrage-driven issuance, the window available for Germany's inaugural US dollar-denominated deal just over a year ago has closed, something most participants agreed. But the deepening of the sub-Euribor levels available to sovereign borrowers, it was generally agreed, is set to go further. The possibility of sovereigns issuing at Euribor less 30bp seems improbable, but it could be on the cards with macroeconomic factors pushing euro-swap spreads progressively higher, and Germany and France not alone in this space at spreads of over 20bp through.
Low bid to cover ratios and overbidding at auctions has further given weight to the argument that government bond auctions simply do not work. The syndication versus auction debate has long been a hot topic, and while bankers are clearly in favour of the former, syndication can often bring mixed experiences as striking newcomer, the Federal Republic of Germany discovered.
The rationale of whether to conduct business through the syndication or the auction route invariably varies from issuer to issuer and can be highly dependent on the complexity of the bond on offer. The overbidding that has characterised the auction process has in the most part been encouraged by bankers looking to increase their market share in an attempt to win the coveted syndicated bond mandate. One IFR roundtable participant went as far to say that if there were no syndications of government bonds, there would be no overbidding at government auctions.
IFR gathered a diverse group of sovereign bond market participants from the investor, borrower and banking communities. The sovereign attendees included Benoit Coeuré of Agence France Trésor and
Gerhard Schleif of Germany's Bundesfinanzagentur, together with David Millar of Scottish Widows Investment Partnership. The underwriting fraternity was represented Zeina Bignier of Societe Generale, Ralph Berlowitz of Deutsche Bank and Ziad Awad of Goldman Sachs.
