Euro zone govts raise 27 bln euros in March bond rush to fight virus damage

LONDON, April 3 (Reuters) – Euro zone governments tapped bond markets for a bumper 27 billion euros in March as they funded stimulus programmes to soften the blow of the COVID-19 pandemic, though they had to lure investors with slightly higher yields.

Conducted via syndications – when borrowers hire banks to target a larger investor base – the deals raised more than four times the volumes of last March and the highest for the month on record, according to Refinitiv IFR data going back to 2013. It was, however, well below January’s tally of 45 billion euros.

“The worldwide health crisis has made sovereigns accelerate their issuance, since their short-term liabilities, for example, cash injections into the healthcare system, state guarantees, tax holidays, deferrals of social security contributions etc., have increased,” the economy ministry for Spain, one of the borrowers, told Reuters.

The sales came during a turbulent month for global markets which endured brutal volatility, with even safer assets such as government bonds suffering as investors liquidated portfolios in favour of cash.

The jump in bond yields to multi-month highs had caused concern that a sharp rise in borrowing costs could derail fundraising plans, especially for weaker southern European states. But those fears were eased by the European Central Bank’s decision to expand its 2020 bond buying to 1.1 trillion euros.

“It’s like central bankers have underwritten a put here, therefore investors being happy to take down supply,” said Rabobank’s head of rates strategy Richard McGuire.

“There is some degree of reassurance that if we hit another rough patch, there is another captive audience for this debt in the form of the ECB.”

However, market conditions forced borrowers to offer buyers a higher yield premium on top of existing bonds, ranging from 6 basis points to as much as 18 bps on a Spanish seven-year issue.

On the other hand, demand was solid, with an 8 billion euro sale from Belgium attracting the highest ever level of investor orders for a euro zone bond sale, at 55 billion euros.

Portugal raised 5 billion euros, receiving its highest ever level of investor orders at 30 billion euros.

Investor interest remains strong despite the likelihood that an economic recession due to the coronavirus will likely force governments to tear up their original borrowing plans and raise more debt than expected.

“This is the strongest response you could wish for to give confidence that new issues are functioning,” said Lee Cumbes, head of public sector debt EMEA at Barclays, which led some of the deals.

“If an investor wants to buy into the market, the syndications demonstrate you are together with other high quality, long term buyers as well. The sizes also help trust in market liquidity,” he added, referring to the level of demand sovereigns achieved.

GOING SHORT

Another feature of the recent sales was that – with the exception of a 30-year bond from Austria – governments tapped three- to seven-year maturities, shorter than they usually opt for when selling through syndicates..

Bankers who arranged the sales said these maturities helped borrowers access the broadest range of investors available, ranging from fund managers, bank treasuries to central banks, given they were looking to sell big issues.

Belgium’s 8 billion euro sale, for example, was the largest it has ever sold in a syndication, according to its debt agency.

Many governments had also fulfilled their funding needs for longer maturities earlier in the year.

However, some looked past the strong investor interest to note that the rush of sales in the bond market was a sign of uncertainty about the future.

“If we were confident that central bank efforts and fiscal policy measures were providing a solution to the virus-related ills, then you wouldn’t need to rush to issue now,” Rabobank’s McGuire said. (Reporting by Yoruk Bahceli; Editing by Hugh Lawson)