ESM-EFSF

The European Stability Mechanism (ESM) has announced a larger than expected borrowing programme for 2020, following the decision to roll over its bill proceeds into its bond funding. The European Investment Bank (EIB) also has a higher target for next year.

Navigating the covered bond market will not be without its challenges in 2020. The Targeted Longer Term Refinancing Operation (TLTRO), European Central Bank deposit tiering and the Covered Bond Purchase Programme have collectively distorted the market, but added to this concoction is the impact of negative interest rates. Against this backdrop issuers, investors and investment bankers gathered in Munich in November to discuss the outlook for covered bonds. It is likely that new issue premiums will gradually tighten, but the path is unlikely to be smooth. January is typically the busiest month, but in 2019, issuers that funded this early paid the highest spreads. And, with the ECB expected to buy in the region of €4.5bn covered bonds a month, issuers will not feel compelled to move early. But the ECB monetary policy has unwelcome implications. Covered bonds have begun to lose value against government bonds, and this will extend if the ECB is unable to loosen restrictions on government bond purchases.

The European Union (EU) and the European Atomic Energy Community (Euratom) have switched the legal framework of their debt issuance programmes from English to Luxembourg law as they prepare for the UK’s withdrawal from the union.

The total funding needs of the European Stability Mechanism and the European Financial Stability Facility is expected to drop next year.

This week's funding scorecard looks at the progress of Europe's supranationals and agencies in the middle of November.

Rating: Aa1/AA/AA

All maturities are open for deals in the euro market, thanks to a widening in benchmark spreads over the past few weeks. SSA issuers are taking advantage of the conditions by issuing in a range of tenors.

The European Financial Stability Facility rounded off its 2019 funding programme on Tuesday, but some on-looking bankers remarked that the deal, though fully subscribed, did not reach the issuer's customary high levels of demand. Meanwhile, Erste Abwicklungsanstalt returned to the euro market for the first time since February 2018.

SSA bankers expect the European Financial Stability to round off its funding programme next week with a tap of a bond in the long end.

Rating: Aa1//AAA

The short end of the euro curve is becoming the new sweet spot for public sector borrowers, according to SSA bankers, despite the deeply negative yields in these maturities. The European Stability Mechanism (ESM), Instituto de Crédito Oficial (Ico) and Investitionsbank Berlin (IBB) are all enjoying strong outings with three or five year tenors this week.

The European Stability Mechanism completed its funding year with a blow-out €3.5bn five year bond on Tuesday, which paid a minimal new issue concession at the final spread.