Reopening dsl 2047 - dutch litmus test

Marketing Communication

EGB Auction Preview Reopening DSL 2047 – Dutch litmus test insights.abnamro.nl      

Group Economics Macro & Financial Markets Research Kim Liu +31 20 343 4669 kim.liu@nl.abnamro.com

22 June 2015

Bloomberg: ABNM

Tomorrow, the DSTA will reopen for the third time the DSL 2047, target size is EUR 1 - 1.5bn The deal could struggle given difficult market conditions and the sizeable auction amount We expect a mid-target level of EUR 1.2bn, which will push YTD funding to almost 65% The Dutch 30y benchmark is trading at cheap levels vs its German counterparts and in ASW terms It also offers value in a 10s30s Bund box trade, despite the recent underperformance of 10y DSLs Cross market, we highlight the relative cheapness vs 30y RFGBs and expensiveness vs 30y RAGBs

Reopening DSL 2047: Dutch litmus test

Bond characteristics

Tomorrow, the DSTA will reopen for the third time this year its 30y benchmark, the DSL 2.75% January 2047. The Dutch

Coupon

Treasury will target EUR 1.0 – 1.5bn. After tomorrow’s

2.75%

Maturity

15 January 2047

Outstanding

EUR 7.6bn

ISIN

NL0010721999

transaction the 30y benchmark will be reopened a final time in September of this year. The DSTA already announced in its Q3 Outlook, which was published last week, that it will aim to raise EUR 0.5 – 1.5bn in September.

Source: DSTA

We think that the DSTA has a strong preference to raise around EUR 1.2bn in tomorrow’s auction. However, market conditions are currently far from ideal and the amount to be issued is significant. This means that if demand is meagre, the DSTA could be forced to adjust the auction price a number of times downwards. Together with reduced liquidity, we see ingredients for extra volatility in the market and a higher likelihood that the deal could struggle. For instance, a long dated Belgian auction (OLO June 2045) drew lacklustre demand today, which could be seen as a bad omen.

In addition, an amount lower than EUR 1.2bn will put significant pressure for the final reopening. The pressure comes from the DSTA’s commitment to increase the outstanding amount of its 30y benchmark to at least EUR 10bn in one year after its launch. Currently, an amount of EUR 7.6bn is outstanding. This means that the DSTA will need to raise a combined total of EUR 2.4bn in tomorrow’s and the final auction in September.

DSTA has revised its 2015 funding requirement marginally The DSTA has updated its funding need in its recently published Q3 outlook. The DSTA announced that the total borrowing requirement has been revised downwards by EUR 400mn to EUR 94.4bn. We already flagged a lowering of the funding need in an earlier note. We also judge that the borrowing requirement could be lowered during the remainder of the year, which could spark scarcity value of especially short term securities (see here for the full publication). For now, the slightly lower borrowing need will be absorbed by a reduction of money market issuance. As a result, the EUR 48bn target on the capital markets remains unchanged.

Capital market issuance will rise to around 65% of target Up to now, the DSTA has raised almost EUR 30bn on the capital markets. This equates to around 62% of its yearly target. Taking into account our expected target of EUR 1.2bn, we expect that after tomorrow’s auction, the DSTA will have raised almost 65% of its EUR 48bn target.

Auction details

Relative value considerations At the beginning of last year, the DSL 2047 was issued at

Auction Date

Tuesday 23 June

Timing

10:00 AM CET

around 16bps, which is the cheapest level in more than 1 year.

Target Amount

EUR 1.0 – 1.5bn

Compared to its more natural German comparable, the DBR

Settlement

25 June 2015

August 2046, the Dutch 30y benchmark is also quoted at its

Source: DSTA

+20bps vs the DBR 2.5% July 2044. Currently, it is trading at

EGB Auction Preview - Reopening DSL 2047 – Dutch litmus test - 22 June 2015

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cheapest level in more than 1 year. Here, the spread equates

DSL- Bund 10s30s box has cheapened recently

to almost 14bps. We think that the Dutch 30y benchmark offers

bps

good value against both German counterparts. In addition, at

4

8.5bps the 30y Dutch benchmark is also trading at its cheapest level of this year in ASW terms.

0

The Dutch 30y furthermore offers value in a 10s30s box spread vs Bunds. This spread has cheapened by almost 6bps

-4

in the last week. However, we note that the Bund curve is almost 10bps steeper than the Dutch curve. The spread between the DSL January 2047 and the DSL July 2025 is close to 62bps. The closest German equivalent, which is the

-8 Mar-15

Apr-15

May-15 May-15 10-30 HOLLAND GERMANY

Jun-15

spread between the DBR August 2046 and the DBR February 2025, is quoted at 72bps. The reason for the flatter 10s30s in DSLs is the underperformance of the Dutch 10y area last week. Nevertheless, the 10-30 box spread still offers value, especially in the short term.

Appendix: New risk framework will lead to extension of debt Last week, the DSTA announced that the Dutch finance minister

Cross market we note the relative cheapness of the Dutch 30y benchmark vs the RFGB 2 5/8 July 2042 at around 11bps. The current level is almost equal to the intra-year high. Compared to RAGBs we do not think the 30y Dutch benchmark offers value. The shorter RAGB 3.15% June 2044 offers 6.5bps more than the DSL 2047.

had submitted a new risk proposal for the management of the national Dutch debt. The new framework aims to further increase the maturity of debt and to reduce the amount of interest rate swaps. The new framework will apply for the period 2016-2019.

The DSTA said that the choices for the next period are consistent with the current policy of increasing the average maturity of debt.

Also the increase in total government debt, combined with

30y DSL – Bund spread is highest in more than 1y bps

historically low interest rates have spurred the decision. This is, to our knowledge, the first time that the DSTA has explicitly expressed a view on the current level of borrowing costs and that

20

it wants to take advantage of it. Up to now, the DSTA could only choose to not swap issuances of longer dated debt. Furthermore it

15

has given a target (average maturity 5.5-6.5 years) for the next years. More details will be released in the second half of the year.

10 5 0 Feb-14

Source: Bloomberg

Minor funding changes and reduction in swaps are likely We expect that the extension of the average maturity of May-14

Aug-14

Nov-14

Feb-15

Yield spread DSL 2047 - DBR 2046

May-15

government debt will be reached by a combination of minor changes in issuance policy and by reducing the use of swap instruments. This could mean for instance that by not swapping

Source: Bloomberg

back issuances of longer (+10y) dated instruments in full, the average maturity will automatically be extended. The DSTA could also decide to issue longer (30y) dated instruments, although this would probably cannibalise its ability to issue the standard benchmark size bonds up to 10 years. We think therefore that the likelihood of issuing more long dated bonds is low. As we have seen this year, the DSTA is already adjusting its funding mix by issuing less on the money markets. We think that this is likely to continue. Furthermore, by using less swap instruments, the average duration will be extended and the DSTA will be less exposed to counterparty credit risks. By using less swaps, issuances could be more prone to volatility and could mean more concession into the pricing of individual securities.

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EGB Auction Preview - Reopening DSL 2047 – Dutch litmus test - 22 June 2015

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