The curve in euros has been drastically distorted by the ECB’s asset purchase programme for months and borrowers have been forced to look to fund in ever longer maturities in order to offer a positive yield for euro investors.
As a result, euro deals with tenors below seven years have been rendered astonishingly scarce. Since the Brexit vote on June 23, only three issuers have printed seven year euro benchmarks, and none have printed shorter tenored benchmarks.
But now, with Bund yields bouncing off their depths, borrowers should be eyeing a rare opportunity to offer some slightly shorter dated euro paper without having to offer investors with a negative yield.
It didn’t take much to push the market out; just some worries of a September rate hike and a disappointing speech from Mario Draghi on September 8.
The window to offer positive yields is unlikely to last though. Comments from Lael Brainard of the US Federal Reserve's board of governors appear to have put a September rate hike off the table and, with the ECB still purchasing €80bn of a dwindling stock of bonds, it is just a matter of time before Bund yields sink back to the levels to which we are gradually becoming accustomed, shutting or shrinking the short and medium term market again.
That means borrowers should take advantage of the opportunity to fund in such rare maturities. Funding levels in short dated dollars may be very attractive when swapped back to euros but securing the extra diversity, and giving euro investors a rare shorter product to buy, should be worth the effort of doing euro deals in shorter maturities.
It's possible there'll be other windows ahead — after all, it doesn’t take much for Draghi to disappoint these days. His claims that the ECB would “act by using all instruments” simply did not satisfy a market which considers anything short of a technical expansion of the scope of QE a let-down.
But it's not like any market worry will open a funding window. Genuinely scary prospects, like political meltdown in Italy or the US, will see a flight to Bunds and vicious volatility. So borrowers must hope for the sweet spot — just enough disappointment to offer positive yields, but no wider market turmoil.
Borrowers should be ready to act, and take the chance to freshen up an increasingly dusty section of the euro curve.