© Reuters. FILE PHOTO: The euro signal is photographed in entrance of the previous head quarter of the European Central Bank in Frankfurt
By Yoruk Bahceli
(Reuters) – The ECB’s huge bond-buying programme has fuelled a bonanza in euro zone sovereign debt, with some traders vastly overstating their orders at debt gross sales in a bid to safe the coveted paper. But now some governments are beginning to say, sufficient is sufficient.
Borrowers together with the European Union, France and Spain are transferring to rein in orders from hedge funds of their syndicated bond gross sales, a authorities official and 4 banking sources concerned within the offers advised Reuters.
The intention is to stem a deluge of inflated orders from these funds, which vastly overstate their demand in an try to ensure they safe their desired quantity of bonds, in line with the sources.
“The concern is that if you don’t have the correct picture, you might make mistakes in the future about what the actual demand for the bonds is,” mentioned Stelios Leonidou, who manages Cyprus’s debt issuance. He advised Reuters he had raised the problem with banks, although didn’t say Cyprus deliberate to curb orders.
The investor rush to snap up sovereign debt is being partly pushed by the European Central Bank’s immense presence within the secondary market, the place it is 1.85 trillion-euro ($2.2 trillion) pandemic warfare chest to shore up the euro zone economic system is making it tougher for traders to search out bonds to purchase.
The likes of hedge funds and another traders wish to make a fast revenue by shopping for bonds in authorities gross sales and flipping them to the ECB for extra.
Order inflation has develop into so excessive of late that authorities debt administration workplaces are pushing again. Two bankers mentioned that they had at instances seen hedge funds placing in orders that exceeded the totality of the belongings they managed.
The European Union has been capping orders, primarily from hedge funds, because the starting of the 12 months and France did so in a March deal, in line with the bankers, who declined to be named as a result of sensitivity of the matter and didn’t specify what the extent of the caps had been. Spain additionally restricted such orders in February, the sources mentioned.
The technique entails having managers at banks clarify to the patrons through the sale course of that the borrower could be capping their orders, which means bids exceeding that cap wouldn’t be considered, the individuals added.
“The message was: you’re not going to get any benefit from putting orders above a certain size,” mentioned one of many bankers.
A spokesperson for the European Commission mentioned it makes use of an allocation coverage according to EU securities legislation.
France’s debt administration workplace advised Reuters there was no particular cap on the order measurement however that banks had been instructed to make traders perceive it might be amenable to orders “more in line” with what they might fairly anticipate to obtain.
Spain’s treasury mentioned its order cap has been in place for a number of years and that it applies “uniformly across categories of investors”.
The ECB declined to remark.
Sovereign bonds are a mandatory asset for a lot of traders, which want them in portfolios to handle danger and returns. Some hedge funds and different traders additionally commerce within the bonds, making it simpler for the debt to be purchased and bought within the market.
However the ECB’s bond-buying since 2015, which it has stepped up through the pandemic, has created an investor rush that has led to provide shortages.
Eight euros of demand chased each euro of syndicated authorities debt in January this 12 months, Reuters evaluation of Refinitiv IFR information exhibits, versus two euros in January 2015.
Order books routinely exceed the funds raised by over 10 instances; final October’s European Union 17-billion-euro challenge set a file, drawing 233 billion euros in bids. Even junk-rated Greece noticed a 26-billion-euro order e-book at a latest 2.5-billion-euro sale of 30-year bonds.
For hedge funds – who’re allotted a comparatively small chunk of bonds by issuers – the supply-demand imbalance means they usually get far fewer than they ask for, in order that they order greater than they want, in line with the interviews with bankers and authorities officers.
This makes it troublesome for governments to gauge the true demand and might make it seem that they’ve underpriced the debt and aren’t delivering worth, despite the fact that a lot of the demand is illusory.
Britain’s Treasury Committee wrote to its debt administration workplace in November, for instance, demanding to know the way it ensured pricing was “keen enough in favour of the taxpayer”.
Buyers are “almost incentivized to inflate their orders to get a reasonable allocation”, mentioned Gareth Hill, a fund supervisor at Royal London Asset Management.
One hedge fund supervisor, who requested anonymity, mentioned that after inflating his order within the latest Greek challenge, he obtained solely 3% of his order. “We didn’t get enough,” he added.
Anthony Requin and Maric Post, heads of the French and Belgian debt administration workplaces, mentioned they might elevate the problem of inflated orders on the European Union’s sovereign debt sub-committee, which meets at the very least as soon as 1 / 4.
Before the ECB’s bond shopping for, hedge funds would solely bid in points if that they had a selected curiosity within the deal, one banker mentioned. “Now, it’s all these players getting involved systematically in every transaction”.
In January, for instance, a 50-year French bond sale noticed 75 billion euros in bids. Requin, the debt administration workplace head, estimates over 80% had been from hedge funds and different so-called relative-value accounts – traders who promote the bonds on shortly, also referred to as “fast-money” accounts.
The numbers had been “completely preposterous”, he mentioned. “They don’t reflect anything,” he added.
The similar month, after receiving a 130-billion-euro order e-book, Spain’s debt administration workplace minimize the yield it supplied on its bond extra sharply than traditional. Bond costs go up when yields fall.
Over half the orders then vanished, an expertise which bankers mentioned spooked debt administration workplaces. Spain’s treasury director common Pablo de Ramon-Laca blames it on hedge fund-type bidders who may need discovered it tougher to profitably flip the paper after the worth hike.
Most “real-money” traders – these equivalent to asset managers and pension funds who maintain onto bonds for an extended interval – accepted the tighter value “but a good many fast-money accounts found that this reduced their profit unbearably”, de Ramon-Laca mentioned.
At France and Spain’s most up-to-date offers in February and March, headline orders did shrink significantly.
Still, the Spanish and French bonds had been oversubscribed 13 and 5 instances respectively. Last week’s 13 billion-euro EU deal drew practically 100 billion euros of orders.
($1 = 0.8522 euros)