Europe’s bail-out fund is expected to be flooded with orders for the eurozone’s debut bond issue on Tuesday as investors around the globe rush to buy the debt in spite of the region’s crisis.
The European financial stability facility will raise the maximum allotted amount of €5bn in five-year bonds. On Monday investors had already placed initial bids of more than €20bn before order books opened early on Tuesday.
Order books were expected to open at 8am London time and some bankers said the books for the issue could fill up in less than an hour.
The landmark issue, which could pave the way to a common eurozone bond, is proving even more popular than a European Union deal, which priced this month and saw order books rise to €20bn.
One banker said: “Investors love these bonds because they offer the safety of a triple A credit, while at the same time they provide a bit of extra yield over German Bunds.”
A leading investor said: “We are buyers of this debt as it is a simple way to get exposure to the eurozone. It is also as safe as houses as it is backed by Germany and won’t ever default.”
The strong demand means the bond, which will mature in July 2016 and is being managed by Citigroup, HSBC and Société Générale, is likely to price at lower yields than the EU bond, which was sold at 70 basis points over German Bunds. This is much lower than Italian and Spanish debt.
The lower-than-expected yields have prompted some strategists to urge policymakers to consider lowering the cost of bail-out loans to countries that need them. These are currently charged at about 300bp over Bunds.
Strategists hope a successful auction will ease tensions further in the eurozone bond markets, which have seen an improvement in sentiment on hopes that the EFSF will be reformed and possibly increased in size to ensure enough money is available in the event of a deepening of the crisis.
The bond is likely to be bought mainly by European funds, though Asian and Middle Eastern investors are expected to buy about 30 per cent of the paper.
More than 400 sovereign and private funds dialled into a conference call with Klaus Regling, head of the EFSF, in advance of Tuesday’s issue, and many signalled that they would be buyers of the bond.
Japan says it wants to buy 20 per cent of the issue, while sovereign wealth funds and central banks in Russia, China and other parts of Asia are expected bid, according to people familiar with the deal.
This month, some bankers expressed worries that the bond could suffer because of the structure of the EFSF, which is guaranteed by member states and has €440bn at its disposal.
But these worries failed to be borne out and investors have not let political uncertainty in Ireland damp enthusiasm for the bond.
The European Commission has said as much as €34.1bn will be raised for Ireland in 2011, €14.9bn of it by Europe’s two financial aid funds.
Source: http://www.ft.com
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