Brighter backdrop as ESM begins public bonds sale

The eurozone’s permanent crisis resolution mechanism is selling bonds in the public market against a brighter backdrop for European peripheral sovereigns.

The European Stability Mechanism opened books on a €3bn no-grow October 2019 benchmark bond yesterday morning, with the deal set to price at 3bp below mid-swaps, the tight end of guidance.

“The ESM has been outperforming its peers; if you compare it to the EIB, it trades well through it,” said a banker away from the deal, adding that the rarity value of ESM’s bonds drove demand for its debt.

The ESM finances loans and other forms of financial assistance to member states. Since the ESM’s inception, Ireland has successfully left the bailout programme and peripheral yields have ground to their tightest levels in years.

Portugal is set to exit its bailout programme without a credit line due to the sovereign’s confidence in continuing low borrowing costs.

Portugal’s bonds have rallied sharply, bringing its funding costs close to eight-year lows from near 17% at the height of the debt crisis in 2012. Portugal’s 10-year bonds are currently yielding 3.55%, according to Tradeweb.

Initial price thoughts on the ESM deal were set by lead managers Bank of America Merrill Lynch, Citi, and Deutsche Bank at mid-swaps flat area on Tuesday afternoon, and official guidance followed at minus 2bp area yesterday morning on the back of the solid investor demand.

At the last update, books had reached €6bn, which will allow ESM to price the trade tighter than its debut five-year benchmark sold in October.