SSA SNAPSHOT: Germany 30yr syndication to test investor appetite

Germany's likely next chancellor, Friedrich Merz, has advocated for a significant increase in defense spending and called for the creation of a EUR500bn infrastructure fund to modernize the economy. The initiatives aim to address heightened security concerns in Europe, particularly following the US suspension of military aid to Ukraine. Concurrently, European Commission President Ursula von der Leyen has unveiled the "ReArm Europe" plan, seeking to mobilize up to EUR800bn to bolster the EU's defense capabilities. This comprehensive strategy includes providing EUR150bn in loans for defense investments, increasing fiscal flexibility for member states to increase spending, and measures to mobilise private capital.

The anticipation of increased government borrowing to fund these defense initiatives has led to a significant rise in German bond yields this morning. For instance, the 10yr bond yield spiked as much as 23.5bp to 2.72%, its highest level since Nov 2023, reflecting investor expectations of a surge in debt issuance. Perhaps more pertinently for today's Federal Republic of Germany syndication is that the underlying 30yr yield also gapped higher (by up to 23bp) taking it above the 3% threshold for the first time since (similarly to the 10yr) November 2023. The question to be answered right now (and we expect it to be addressed positively) is what impact will this have on investor demand for the proposed new Aug 2056 Bund? Guidance has been released at +4bp area versus DBR 2.5% Aug 2054 (mid) which at first glance appears to be bang in line with expectations given a very flat curve at that tenor. For context, and just in case the sudden additional concession spurs on demand, Germany's highest order book to date is EUR74bn achieved when it first issued the Aug 2054 line (today's reference bund) back in January 2024. Although the backdrop for today's deal may be far from ideal we still felt it worth noting that over the course of the last 5 years long end syndications from Germany have been completed with an average spread compression of 0.8bp from IPT to re-offer and an average NIC of just 0.5bp.

With Germany the likely headline grabber today we shouldn't overlook that Land Baden Wuerttemberg is also visiting the euro capital market with a new EUR1bn WNG 5yr LSA (IPT: m/s+27a). That comes on the back of similar maturity LSA deals this year from Lower Saxony, Land NRW and Saxony-Anhalt which were seen on screens this morning with spreads in the region of i+24.5a (NRW) to i+26a.

On the dollar side of the fence, where UST yields are actually lower on the day, Danish municipality financier KommuneKredit is busy putting the final touches to a new USD1bn 5yr line. Books were opened during Tuesday's session with an IPT of SOFR m/+47a, a level which has helped secure IoIs in excess of USD2bn, in turn enabling a revised guidance 1bp inside the IPT (although still not finalised).

Live deals

---- Subscribe to read more ----

To receive this analysis plus much more, subscribe to IGM. Request your free trial of the service today.