Friday 22 September 2017

Solid demand at French bond auction despite rating loss fears

No such success for EFSF in €3bn sale to raise funds for Ireland and Portugal

Thomas Molloy

Thomas Molloy

FRANCE saw solid demand at its first bond auction of 2012 yesterday but it was a different story as the EFSF sold bonds to help fund Ireland and Portugal.

Yields on the latest French bond rose only slightly despite fears that the country is set to lose its AAA rating and uncertainty surrounding the presidential elections, which could see a change in policy in the eurozone's second largest economy.

However, the euro has dropped to its lowest rate against the dollar in 16 months as concerns continue over the health of Europe's banks. The euro fell as low as $1.2780 against the dollar and was at an 11-year low versus the yen.

Markets were unsettled after France's cost of borrowing rose and a Spanish minister suggested its banks may face a higher bad-loan bill.

Bank stocks dropped, with shares in Italy's UniCredit at a 19-year low.

The French auction was nearly twice oversubscribed with France selling €7.96bn of bonds, at the top of its projected range. The yield on the benchmark 2021 bond inched up to 3.29pc -- just 11 basis points higher than when the bond was last auctioned on December 1.

"Overall it's a pretty solid auction," said Michael Leister, strategist at DZ Bank in Frankfurt. "It should be enough to dispel concerns with regards to France's funding capacity for the time being."

Next week's bond sales by Italy and Spain are seen as the year's first big tests of fragile eurozone countries' ability to borrow at affordable levels.

Redemptions

Italy, with 10-year bond yields above the 7pc level widely seen as unsustainable, must pay out €100bn in bond coupons and redemptions in the first four months of 2012 alone.

"The outlook for French bonds hinges critically on policymakers' ability to shore up confidence in eurozone sovereign debt markets, in particular Italy," said Nicholas Spiro of Spiro Sovereign Strategy. "Perceptions of French risk have become inextricably linked with perceptions of the eurozone."

Signs of those linkages could be seen when the EFSF went to the markets yesterday to sell €3bn worth of bonds to raise money for Ireland and Portugal.

The bonds were sold at a yield spread of almost seven times its first issue a year ago as the eurozone crisis saps demand for anything connected to the bailout fund.

The EFSF, which owes its top credit rating to guarantees from nations including France and Germany, priced the bonds to yield 40 basis points more than the benchmark swap rate, a banker involved in the deal said.

That compares with the six basis-point spread it paid to sell €5bn of July 2016 bonds this time last year, according to data compiled by Bloomberg.

"It reflects the changing market backdrop, the concerns over the swathe of potentially imminent ratings downgrades within the eurozone, which would see the EFSF also lose its own gold-plated rating," said Richard McGuire, a senior fixed-income strategist at Rabobank International in London.

The new bond is the EFSF's first three-year issue and follows a November sale that was delayed because of the deepening euro-region sovereign crisis.

Standard & Poor's said last month that the fund could lose its top credit rating should one of its AAA-rated guarantors be downgraded. (Additional reporting Bloomberg)

Irish Independent

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