Capital Markets Weekly: German 30-year Bund sale at negative yields attracts limited demand

Negative-Yield German supply

On 21 August, Germany auctioned up to EUR2 billion of 30-year Bunds, the first primary sale of a 30-year bond without interest and at a negative overall yield. The issue cleared at an average issue price of 103.61% yielding -0.11%, in line with secondary-market comparable Bunds at the time. According to Germany's Finanzagentur, its debt management agency, EUR869 million of bids were received and EUR824 million allocated.

In secondary trading, Germany's outstanding 30-year bonds entered negative-yield territory only in early August, reaching a record low closing yield of -0.27% on 15 August. On 16 August, in intra-day trading this reached -0.313%, before reversing on media reports of potential softening in Germany's balanced budget stance. On the same day, Germany's 10-year yield had reached another record low of -0.727%.

Also on 21 August, Berlin Hyp sold three year covered bonds at -0.59%, the deepest negative yield to date for a fixed-rate non-sovereign bond. It gained EUR1.2 billion of demand permitting it to sell EUR 1 billion, its largest deal volume for six years.

Other debt

Italian bonds have remained stable this week despite the resignation of Prime Minister Guiseppi Conte, seemingly encouraged by efforts to form a new government rather than to seek early elections. Having spiked 40 basis points to 1.81% when the splits in Italy's government first emerged, they traded around 1.4% during Conte's departure, and now stand at 1.31%.

3M dominated high grade supply with a four-part USD3.25 billion package on 19 August, funding its purchase of Acelity, a medical device manufacturer. Development Bank of Japan obtained USD3.45 billion in demand for a two-part USD1.8 billion sale, including a ten-year tranche, reviving this segment in the SSA market. Land NRW and Nederlandse Waterschapsbank also are progressing dollar sales.

Danske Bank has made further progress in re-establishing its market standing, gaining EUR2.5 billion of demand for a EUR1 billion six-year issue.

UBS raised AUD700 million of Additional Tier 1 debt, gaining an unexpectedly large order book of AUD4 billion (USD2.7 billion). This enabled it to tighten pricing by 75 basis points to price at 4.375% to initial call.

US conglomerate Danaher is marketing Euro-denominated debt, with market participants expecting wider use of the Euro sector by US companies after Labor Day to benefit from its current conditions.

Indian bank equity

India's Yes Bank, a private sector lender, was reported on 16 August to be seeking USD600 million equivalent fromin a further equity sale to boost its capital buffers and underpin future growth. On 14 August the bank sold 231 million shares worth INR19.3 billion (USD270 million) through a qualified institutional placement. This was reportedly substantially oversubscribed, with 40% of the deal allocated to non-domestic Asian buyers, and 34% to US and European investors. Demand was dominated by five strategic investors.

Other Indian banks also will seek equity shortly:

• On 18 August, Bank of India, a state-owned bank which emerged from the Reserve Bank of India's prompt corrective action program earlier in 2019, announced it plans to raise INR 15-20 billion within 2019. The bank reportedly is planning to expand lending to the agricultural sector and SMEs following government encouragement to increase funding for priority areas of the economy.
• According to the Economic Times of India, other banks likely to seek capital this year include State Bank of India, Bank of Baroda and Canara Bank, from within the state-owned sector, and Axis Bank and RBL among private banks. It attributes this to banks seeking to expand their lending to take market share from troubled non-bank financial sector entities, and from the ongoing impacts of balance sheet clean-up efforts on their capital positions.
• In March 2019, State Bank of India had sought an extension to prior plans to raise INR20 billion in additional capital, targeting that this should be completed within fiscal 2020. In July 2019, it also announced plans to raise USD1 billion (INR71.35 billion) of Additional Tier Capital perpetual debt.
• On 19 August, the broadening nature of bank capital-raising was further indicated by a statement by United Bank of India that it will seek INR8-10 billion in additional capital. The Kolkata-based government-owned bank advised that it plans to grow its loan book from INR730 billion to INR810 billion by end-March. It reported modest profits in Q2 2019 but this followed seven successive prior quarters of losses.

Implications and outlook

This week's supply is relatively quiet: this reflects seasonal factors, notably the vacation season ahead of Labor Day in the USA, and in Europe during August.

Germany's 30-year bond sale is noteworthy more for its symbolic importance as the first 30-year new bond issue sold with a negative return, than from a practical market perspective (since 30-year bunds have been trading at negative yields throughout August), or for the modest amounts sold. Demand appears limited, with Germany raising less than half the maximum amount offered and with a bid- to-cover ratio of just 1.05 times. The bid- to-offer ratio of just 0.43 is described by the Financial Times as the weakest performance (using this measure) since 2011. Conversely, Berlin Hyp's sale showed strong demand for heavily negative-yielding assets for a much shorter maturity: its deal was larger than usual despite the -0.57% yield.

Elsewhere, the success in India of Yes Bank's initial share raising against the background of volatile and difficult primary equity markets appears risk-positive, although the transaction was anchored by strategic buyers. Overall, we expect Indian banks to have sizeable further needs. Part of these stem from the risk-positive process of balance sheet clean-up. However, we are less positive about growing indicators that state banks will expand their lending in response to government pressure to lend more in policy-priority areas including agriculture, SME development and infrastructure. Several banks planning increased lending have poor recent performance records and thus appear more-challenging candidates to access new equity in an active market. State-driven lending also threatens increased loan impairment, hurting bank profitability and reducing capital accumulation from retained earnings, potentially expanding banks' external needs.

Posted 23 August 2019 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, S&P Global Market Intelligence