EMU 2013 Supply Update: Q3

EMU countries raised around 86% of their combined funding need ahead of Q4

Spain already raised 45% of its funding via maturities exceeding 5 year

2014/2015 issuance will be higher, mainly because of larger redemptions

EMU bond issuance: ahead on schedule

During the third quarter of the year, main EMU countries raised significantly less than during the first half of the year. This is normal, given treasuries’ preference to frontload issuance and given the low activity during the summer recess. In Q3, they raised €186.80B, compared to €261.83B in Q1 and €257.95B in Q2. During the first three quarters of the year, main EMU countries raised around 86% of their combined funding need for the year. This is a comfortable situation at the start of the final quarter and means treasuries can start prefunding for 2014.

Italy & Spain

Italian and Spanish issuance continued to go smoothly. Both countries are around 87% funded for the year. At the start of September, the Italian Senate budget committee approved a request to raise the ceiling on this year’s net debt issuance. The funds will be used to finance the larger deficit, pay outstanding bills to firms and prefund for next year. Italy’s 2014 bond redemptions amount to €188B, significantly more than this year’s €155B. We increase our estimate for this year’s Italian medium‐to long term bond issuance from €200B to €220B. The new Italian political deadlock will likely weigh on Italian supply, though we don’t expect a sudden stop. During the political instability at the start of the year, the Italian treasury also managed to raise funds. The treasury will likely put more emphasis on issuing shorter dated debt. On top, MFI government bond holding data show that Italian banks remain large buyers of national debt.
Since the end of 2012, government bond holdings increased from €357B to €423B at the end of August. This is a positive for stable demand at the auctions. The share of Italian debt in hands of non‐residuals is stable since early 2012. On the one hand, that’s a positive as there weren’t any outflows during eg the political deadlock at the start of the year. On the other hand it’s a negative that the foreign investors’ share still didn’t recover to pre‐crisis levels.

When we compare the Spanish and Italian issuance at the different segments on the curve, we clearly see an improvement. Last year, Spain for example only managed to raise €30% of its issuance at tenors > 5‐yr.
This year, they raised 45% of their funding at the longer tenors. In Italy, we see a similar development though to a lesser extent.

Belgium

The Belgian debt agency successfully launched a new syndicated 30‐yr benchmark issue (3.75% Jun2045) for €4B. It was the first 30‐yr benchmark since the launch of OLO 60 in April2010. The issue lengthens the Belgian yield curve by 4 years. The treasury received bids in excess of €5B. The new OLO 71, the longest outstanding Belgian benchmark issue, was priced to yield 113 bps over MS (or 27.8 bps over OAT 2045), at the tight end of the MS +113/115 bps spread guidance. OLO 71 is the final new benchmark for 2013. The average term to maturity of Belgian debt increased further from 7.18 years at the start of the year to a record 7.47 years at the end of August. September figures will normally reveal a further lengthening because of the 30‐yr benchmark.
Belgium nearly completed this year’s funding need (97% funded). The two remaining OLO‐auctions (October/November) will be used to complete the borrowing requirement and start 2014 prefunding. There are also three optional ORI (optional reverse inquiry) auction dates left (small amount; off the run OLO’s on demand). So far, no ORI‐auction took place in 2013.

Slovakia

Slovakia raised €7.07B year‐to‐date via a combination of regular auctions, the launch of a new 5‐yr and 10‐yr syndicated benchmark and CHF & JPY denominated retail bonds. Ardal completed around 85% of this year’s expected issuance. That leaves €1.3B yet to be raised without prefinancing.

2014 preview

When we take a first quick glance at the 2014 supply outlook (detailed analysis early 2014), we see that gross borrowing requirements of main EMU countries will likely be higher than this year. The main reason is the higher amount of bond redemptions, which is only partly offset by lower deficits. Especially Italy (€188B vs €155B), Austria (€22B vs €13B) and Spain (€68B vs €60B) face this problem. For Spain and Italy, higher bond redemptions in 2014/2015/2016 are a direct consequence from the EMU crisis. During 2011 and the first half of 2012, they had to rely mostly on very short term maturities to complete funding. In 2015, bond redemptions increase further for both countries. Italian redemptions augment from €188B to +‐€240B. Spanish redemptions jump from €68B to +‐ €88B.