After a busy start to the new year, the European primary bond market was quiet Friday with most of Europe on holiday. The cost of insuring European corporate and sovereign debt was mixed as investors remain nervous about the euro zone crisis.
The SSA market, comprising sovereigns, supranationals and agencies, saw EUR5.75 billion worth of bonds issued in the first week of 2012. Of these, the European Financial Stability Facility’s EUR3 billion three-year bond dominated and may have boosted market confidence, paving the way for more SSA issuance next week.
Market participants expect the competition among supranational agencies to increase over the second and third week of January, with issuers vying to come to market quickly in an uncertain environment. High-quality agencies are expected to continue to attract investors despite the ongoing euro-zone crisis.
However, location still matters, even for the highest quality supranational issuers, impacting pricing and access to funding.
The cost of the EFSF deal–with a spread of 40 basis points over midswaps–reflects concerns about both the future of the fund as well as the region’s debt crisis and the possibility that France may yet be downgraded.
The EFSF’s pricing contrasts starkly with that achieved by the German state of Hessen which priced its EUR1 billion five-year bond at seven-basis points over midswaps Thursday, well below the spread offered by the EFSF.
State-owned German development bank KfW also priced a $4.5 billion, three-year bond at 25 basis points over midswaps late Thursday. Syndicate bankers noted KfW is likely to come with its first euro-denominated bond as early as next week.
Elsewhere, the secondary market remains jittery about the euro-zone debt crisis and broader contagion with Spanish and Italian yields widening again Thursday.
At 1515 GMT, the SovX Western Europe index, which investors can use to buy or sell credit default swaps on a basket of 15 sovereign borrowers, was eight basis points wider at 380/385 basis points compared to Thursday, according to data-provider Markit.
The iTraxx Europe index, which comprises 125 high-grade borrowers, 25 of which are banks and insurers, was flat at 177/178 basis points. The Crossover index of 40 mostly sub-investment-grade European corporate borrowers was three basis points tighter at 753/757 basis points.
Credit default swaps are derivatives that function like a default insurance contract for debt. If a borrower defaults, sellers compensate buyers.
EasyForexNews Research Team