Global Rates Strategy
21 May 2020
Global SSA May20 outlook post COVID-19 shock
OW EU/ESM fading excessive supply pressures
Aditya ChordiaAC
(44-20) 7134-2132
@
. Morgan Securities plc
Phoebe White
(1-212) 834-3092
@
. Morgan Securities LLC
Jay Barry
(1-212) 834-4951
@
. Morgan Securities LLC
Antoine Gaveau
(44-20) 7134-2880
@
. Morgan Securities plc
Francis Diamond
(44-20) 7134-1504
@
. Morgan Securities plc
Natalie Matejkova
(1-212) 834-7218
@
. Morgan Securities LLC
mailto:@
mailto:@
mailto:@
mailto:@
mailto:@
mailto:@
mailto:@
AC Indicates certifying analyst. See last page for analyst certification and important disclosures.
Summary
€-SSA
EU COVID-19 response and €-SSAs: FAQ of policy measures in response of COVID-19 break: ESM PCS, EC SURE, EIB Pan-European Guarantee fund, EU Recovery fund
(slide 3-6)
2020 €-supras supply: significant (potential) increase due to COVID-19 support from ESM & EU whereas unchanged for EFSF & EIB (slide 5)
€-supras and ECB purchases: ECB will conduct ~€80bn net & ~€100bn gross supranational purchases in 2020 under current programmes; risk biased towards higher purchases
on PEPP upsizing (slide 9)
€-SSA spreads outlook: turn OW €-supras via long ESM or EU vs. swaps and stay OW German regional bonds (slide 15)
Trading theme 1: OW EU/ESM as market pricing excessive supply pressures; enter long 10Y ESM vs. swaps (slide 16)
Trading theme 2: stay OW German regional vs. federal bonds; keep long 5Y NRW vs. Germany; close long 10Y Madrid vs. Spain at loss (slide 17)
Trading theme 3: OW 2-3Y€-SSAs vs. France offers attractive pick-up and acts as a risk-off hedge, move longs in KfW vs. France from 4-5Y to 2-3Y (slide 18)
Trading theme 4: modest flattening bias on 3s/10s €-SSA credit curve; strong steepening bias on 10s/30s (slide 19)
$-SSA
$-SSA spreads outlook: spreads have normalized after reaching multi-year wides at the end of March and now appear fairly valued after adjusting for their fundamental
drivers (slide 23)
Trading themes: we think $-SSA spreads are likely to trade range bound to modestly narrower over the course of 2020. We recommend trading the extremes (slide 23)
Demand: central bank sponsorship for new EIB/KfW issues has increased further in 2020. Regionally, takedown from European investors has declined, but they remain the
largest participants in new-issue deals. Order book size data from KfW indicate investor demand remains strong against a backdrop of undersupply (slide 24)
Supply: we look for a modest increase in aggregate $-SSA funding needs in 2020, but maturities are expected to increase, and we project -$15bn in net issuance next year
(slide 25)
£-SSA
£-SSA spreads outlook: £-SSA biased narrower on lack of supply pressures (slide 29)
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Trading theme: 10Y £-SSA trade relatively cheap vs. gilts compared to 5Y; we go long 10Y £-SSA vs. gilts (slide 30)
1
14€-SSA market trading themes
22$-SSA market update
£-SSA market update 26
Appendix 38
All exhibits shown in the presentation are sourced from . Morgan unless otherwise stated
2€-SSAs & COVID-19 response – supply, QE
EU COVID-19 response and €-SSAs
Over the past few weeks European institutions have announced a series of policy measures as European policy response to the COVID-19 outbreak
ESM Pandemic Crisis Support (up to) €240bn credit line – already operational
European Commission SURE (up to) €100bn scheme –most likely to be operational in 3Q20
EIB Pan-European Guarantee fund (up to) €200bn – likely to be operational in coming weeks
Also work continues towards an ambitious EU Recovery Fund to support robust recovery from the COVID-19crisis
European Commission will present proposal for the fund in late-May; the fund will likely be linked to the next European budget (MFF) starting in
2021 and therefore likely be able to provide loans/grants from 2021
Along with European response, national agencies like KfW are also providing support in COVID-19 response
We discuss in detail the European policy responses and potential supply implications in following slides
Summary of EU policy response to the COVID-19 crisis;
Instrum ent Purpose Size Operational Comments
ESM
Pandemic
Crisis
Support
Safety net
for sov
ereigns
€240bn Yes
Max imum capacity unlikely to be used as only beneficial for sov
ereigns w hose cost of funding higher than ESM, so the potential
usage (if sovs.
decide to use it) w ill be ~€60-70bn
EC SURE
Safety net for
w orkers
€100bn
Not y et, likely in
3Q20
Funding w ill come v ia EU bond issuance; w e ex pect a decent take-up
once
operational, likely in 3Q20
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EIB Pan-
European
Guarantee fund
Safety net
for
businesses
€200bn
Not y et, likely
in coming w
eeks
Negotiations still going on main parameters of the scheme and likely to
be
finalised in near future; the fund w ill be used to prov ide support v ia
guarantees hence most likely no upfront issuance w ill be required
EU Recov
ery
Fund
To support
sustainable
recov ery
post
COVID-19 crisis
TBC Mostly in 2021
3
EC to present proposal for recov ery fund in late-May and w ill most
likely be linked to nex t MFF starting 2021
Source: European Commission, ESM, EIB, . Morgan
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¹Fitch/Moody's/S&P/DBRS/SCOPE, ² DBRS: unsolicited rating , ³ SCOPE: unsolicited rating, Source: European Commission investor presentation:
finance/
Summary of European supranational issuers from EC investor presentation
European Union (EU) EFSF (data as of05/12/2019) ESM (data as of05/12/2019) EIB (data as of 30/06/2019)
Legal
Foundation
Supranational body established under
EU Treaty (TFEU)
Priv ate Company ('SocieteAnony
me') incorporated under Lux
embourg Law ,
founded on an international agreement
International financial institution
established under international treaty -
Multilateral
Lending Institution (since October 2012)
Autonomous public financial
institution established under EU
Treaty (TFEU,
) - Multilateral Lending
Institution
Lending capacity
EFSM: €60bn, utilised
€, outstanding:
€
BoP: €50 bn, utilised: €
bn, outstanding: € bn
MFA: no ceiling, € outstanding
440bn
Utilised: €
Outstanding:
€
500bn
Utilised: €,
Outstanding:
€
Av ailable capacity : €
250% of subscribed capital, reserv es,
non allocated prov isions and profit and
loss account surplus, less equity
participations (ex cluding loan
substitutes):
Loans disbursed: €429bn
Loans to be disbursed: €101bn
Mandate
Prov ide financial assistance to
countries in financial and economic
difficulty in order to promote economic
and social integration of
the member states
Prov ide financial assistance to euro
area member states in difficulties in
order to safeguard financial stability
in Europe
Prov ide financial assistance to euro
area member states in difficulties in
order to safeguard financial stability
in Europe
EU's long-term lending institution:
finances sustainable inv estment
projects that contribute to EU policy
objectiv es. More
than 90% of activ ity in EU.
Shareholders 27 EU member states
17 euro area member states (w ithout
Latv ia
and Lithuania)
All 19 euro area member states 27 EU member states
Support to
Bondholder
s
EU budget and member states'
obligation to prov ide the funds
necessary to meet the EU’s legal
obligations.
EU Budget 2020: € in pay
ments (€ bn in commitments).
Ex plicit, irrev ocable and unconditional
guarantee of the members; 'sev eral'
liability ex cept for Member States in a
programme (‘stepping out’)
ov erall guarantees; bond
issuance backed by up to 165% ov er
guarantees.
Share capital comprising paid in capital
and callable capital. Ex plicit, irrev
ocable and unconditional obligation to
pay the share of callable capital on
demand; 'sev eral' liability
Callable capital:
€ Paid-in
capital: €
Ex plicit obligation on EIB's
shareholders to pay their ow n share of
the callable capital, on demand from
the Board of Directors; 'sev eral'
liability .Callable capital: €
Paid-in capital reserv es and surplus:
€
Subscribed capital: €
Credit Ranking De facto preferred creditor Status Pari passu
Preferred Creditor, but junior to IMF /
Pari
passu for Spanish bank recapitalisation
Preferred Creditor Status
Ratings¹ AAA/Aaa /AA/AAA²/AAA³ AA/Aa1/AA/AAA² AAA/Aa1//--/AAA² AAA/Aaa /AAA/AAA²
2020 €-supras supply: significant (potential) increase due to COVID- 19
support from ESM & EU whereas unchanged for EFSF & EIB
225
200
175
150
125
100
75
50
25
0
100 103
80 78
6
3
50
29
87
72 74
110-
205
51
€-supra: EFSF,
ESM, EU and
EIB.
Source: EFSF,
EIB, ESM, EU,
. Morgan
Source: EFSF, EIB, ESM, EU, KfW, . Morgan 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020f
ESM: until a sovereign taps the PCS the funding programme is unchanged, currently €11bn for 2020. As discussed in slide 6, if peripheral sovereigns decided to tap PCS (a close
call now), ESM supply could go up by €60-70bn. ESM will likely use a range of instruments (T-bills, bonds, $ issuance) and also split disbursements over time (15%pm committed)
to reduce undue supply pressure. We expect a heavy reliance on T-bills at least at the beginning to avoid pressure on bond markets. In terms of timing, the COVID-19 supply could
come as early as from June, again a close call if sovereigns go for it or not
EU: funding needs for 2020 and 2021 will increase significantly from current target (€ 2020 & €10bn 2021) once EC SURE is operational as we expect a decent take-up
(€50-80bn). The 2021 funding needs for EU could also see a significant increase as the Recovery Fund, currently under discussion, could potentially be funded via EU bonds. Although
EU has no T-bill programme currently, but given the potentially large funding programme, we expect them to also use range of instruments (T-bills, bonds) and also split disbursements
over time to reduce undue supply pressure. In terms of timing, we believe the earliest EU funding for EC SURE will come to market in 3Q20
EFSF: no change in 2020 funding needs as EFSF is closed for new loans; net issuance will be small negative for 2020
Record €-supra €-denominated issuance in 2020 due to
COVID-19 support via ESM and EU funding
Annual €-supra gross €-denominated supply; JPM estimate for 2022;
€bn
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ESM and EU supply would likely increase significantly due
to EU COVID-19 policy response whereas EFSF and EIB
annual issuance will remain unchanged Estimate of 2020
issuance for selected SSA issuers; official forecasts and . Morgan
estimates; €bn
All ccy gross issuance 2020 potential €-den.
issuance
2020 pre-
COVID-
19 forecast
Potential
COVID- 19
supply increase
2020 potential Gross Net
EFSF 20 0 20 20 -4
EIB ~60 0 ~60 30 0
ESM 11 0-70 11-80 10-75 5-70
EU 1 50-80 50-80 50-80 50-80
Supras 92 50-150 140-240 110-205 50-150
KfW 75 0 75 40 17
5
EIB: the COVID-19 support provided via EIB is most likely in form of guarantees, hence no upfront issuance will be required, therefore, 2020 issuance forecast remains
unchanged for the time being. Over time there could be funding potential needs if there are losses on extended guarantees
KfW: as discussed in slide 8, 2020 KfW funding plan in capital markets is still unchanged at €75bn (all ccy) as all the funding for COVID-19 loan programmes is directly
channelled through the new government-owned Economic Stabilisation Fund (Wirtschaftsstabilisierungsfonds—WSF)
6
EU COVID-19 response and €-SSAs: ESM
Key highlights of ESM Pandemic Crisis Support (PCS)
ESM link:
Who can borrow? PCS is based on their Enhanced Condition Credit Line (ECCL) and is
available to all Euro area countries
What are the conditionalities? The only conditions to access the PCS is that the applying sovereign
uses the fund to support domestic financing of direct and indirect healthcare, cure and prevention
related costs due to the COVID-19 crisis
How much can be borrowed? Countries can draw up to 2% of their end-2019 GDP, around
€240bn if all 19 Euro area countries decide to borrow. The PCS makes sense only for those sovereigns
whose cost of funding is higher than the ESM. Therefore, potential usage would be
€60-70bn if countries decide on basis on funding considerations. However, despite the clear funding
benefit for peripheral sovereigns, domestic political considerations are playing a large role in the
decision to access the PCS. We still believe that the peripheral sovereigns would eventually tap the
ESM credit line under our base case, however the recent developments on recovery fund,
alternate use of funding by the periphery like BTP Italia, and improving market conditions are
making it a close call
What are the terms of the loan? The loans will have a maximum average maturity of 10 years. The
cost will be the ESM cost of funding + 10bp annual margin + 5bp annual service fee + 25bp one-off
up-front cost.
What is the impact on ESM funding? Until a sovereign taps the PCS the funding programme is
unchanged, currently €11bn for 2020. ESM will likely use a range of instruments (T-bills, bond,
$ issuance) to cover the funding needs smoothly. We expect a decent reliance on T-bills at least at
the beginning to avoid pressure on bond markets. Also as per ESM Q&A, “In general, a country can
draw up to 15% of the aggregate amount of the Pandemic Crisis Support approved for the respective
member state in cash per month. It is possible for
the ESM to provide additional liquidity related to
a particular disbursement when it has the funds
available.” This should also help in reducing
supply pressures
When can the countries apply? The PCS is
fully operational now. The ESM can disburse
money under the credit line over a period of 12
months, which can be extended twice for six
months
Potential usage of ESM PCS would be
€60-70bn if countries decide on basis on
funding considerations
Available allowance for Euro area sovereigns
under ESM PCS;
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2019 GDP
(€bn)
ESM
PCS (2%
GDP,
€bn)
Funding
benefit
form
using PCS*
German
y
France
Italy
Spain
Netherland
s Belgium
Austria
Ireland
Finland
Portugal
Greece
Slov akia
Lux
embourg
Lithuania
Slov enia
Latv ia
Estonia
Cyprus
Malta
3,436
2,419
1,788
1,245
812
474
399
347
240
212
188
94
64
48
48
31
28
22
13
69
48
36
25
16
9
8
7
5
4
4
2
1
1
1
1
1
0
0
No
No*
*
Yes
Yes
No
No*
*
No
No*
*
No
Yes
Yes
Yes
No
Yes
Yes
Yes
n/a
Yes
Yes
Total 11,907 238 -
Total for those funding
benefit
using PCS*
74
*If 10Y sovereign yield is greater than 10Y ESM yield + 15-20b, then the
sovereign most likely have a funding benefit from borrowing form ESM. This is
a rough judgement as the benefit will also depend on evolution of funding costs
over the time of the loan. ** Border cases.
Source: European Commission, ESM, . Morgan
7
EU COVID-19 response and €-SSAs: EU via EC SURE & Recovery fund
Key highlights of EC SURE
EC SURE link:
What is EC SURE?SURE stands for Support to mitigate Unemployment Risks in an Emergency. The loans will help member states to cover the costs directly related
to the creation or extension of national short-time work schemes, and other similar measures in response to COVID-19 crisis
When will it be operational? A political agreement on all aspects of the scheme has been reached and now formal procedures are ongoing to make it operational and
have the guarantees in place. As per the 15 May Eurogroup press conference, the SURE will likely be operational in 3Q20
What is the size and procedure to get loans? Up to €100bn. All member states are eligible. Member states will have to apply and then their will be a consultation with the
EC to define the terms of the loan (size, maturity etc) based on the evaluation of the increased public expenditure on short-time work schemes etc. After consultation the
EC will put a proposal in front of the Council for approval, once approved the disbursements could be made
How will the loans be funded? The EC will issue EU bonds and on-lend the amount to the member state based on the loan-agreement. As per EU investor
presentation: “Newly issued bonds will enjoy the same status as those issued for existing loan programmes. EU funding can, like in the past, be combined to satisfy
simultaneous borrowing needs for all EU loan programmes (EFSM, BoP, MFA and SURE). EU bonds are and will remain direct and unconditional obligations of the
EU. For the SURE instrument EU member states will provide additional guarantees (EUR 25 billion, 25% of the overall amount) to protect the budget.”
What is the impact on EU funding? The EU funding needs for 2020 and 2021 will increase significantly from current target (€ 2020 & €10bn 2021) once EC SURE is
operational as we expect a decent take-up. The 2021 funding needs for EU could also see a significant increase as the Recovery Fund, currently under discussion, could
potentially be funded via EU bonds. In terms of timing, we believe the earliest EU funding for EC SURE will come to market in 3Q20
Key highlights of EU Recovery Fund
The European Commission is working on a proposal for EU Recovery Fund to be used to support robust recovery from the COVID-19crisis. They are aiming to present
the proposal on 27 May. It is fair to assume that it will take at least few months of tough negotiations to reach a deal on Recovery Fund. As per media headlines, they
are aiming for >1tn Recovery Fund which will provide both grants and loans. Also the Recovery Fund will likely be linked to the next European budget (MFF)
starting in 2021 and hence any loans/grants will be available from 2021
On 18 May, Germany and France presented a proposal for a €500bn Recovery fund, financed by the borrowing of the EU Commission, to be repaid via the
revenues of the EU budget. We discussed the details in EU: Merkel pushes the envelope
The Franco-German proposal suggests using EU bond issuance to fund the Recovery Fund. We see decent chances of EU issuance being used for the fund, most likely
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starting in 2021
EU COVID-19 response and €-SSAs: EIB & national agencies like KfW
Key highlights of EIB Pan-European Guarantee fund
EIB link: #
What is the EIB Pan-European Guarantee fund? It will a €25 billion fund funded via EU Member States pro rata to their shareholding in the EIB and /or other
institutions. As per the EIB website: “This guarantee fund will enable the EIB Group – in partnership with local lenders and national promotional institutions – to
scale up its support to SMEs, mid-caps and corporates in the real economy by mobilising up to €200 billion”
When will it be operational? Negotiations are still going on main parameters of the scheme and are likely to be finalised in near future
Will it impact EIB funding? The fund will be used to provide support via guarantees hence most likely no upfront issuance will be required. Therefore, we expect EIB’s
2020 issuance target to remain unchanged around €60bn. Over time there could be funding potential needs if there are losses on extended guarantees
Key highlights of KfW involvement in the Germany’s COVID-19 response
KfW link:
On behalf of the government and part of a comprehensive package of measures, KfW is responsible for various loan facilities providing liquidity aid for COVID-19
affected companies in Germany
As per the KfW website: “The Federal Ministry of Finance is authorized to refinance KfW’s funding requirements resulting from the KfW Special Programme 2020
and the KfW Instant Loan 2020 programme up to an amount of EUR 100 billion. This refinancing option is limited until year-end 2021, but KfW is under no obligation
to utilize it. Any refinancing of the Federal Ministry of Finance would be provided by the new government-owned Economic Stabilisation Fund
(Wirtschaftsstabilisierungsfonds—WSF), which is currently being set up in response to the COVID-19 pandemic. The WSF is administered by the Federal Republic of
Germany – Finance Agency (Bundesrepublik Deutschland - Finanzagentur GmbH, the “Finance Agency”), the central service provider for the Federal Republic of
Germany’s borrowing and debt management. The new refinancing possibility for KfW through the WSF complements KfW’s regular capital markets activities.”
Therefore, the 2020 KfW funding plan in capital markets is still unchanged at €75bn
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8
9
We estimate on average €8bn/m of net supra purchases
under current PSPP+PEPP programmes and could
potentially go to €12bn+/m under our base case scenario
of PEPP upsizing
Monthly net PSPP supranational purchases; . Morgan
forecast in grey from March 2020; €bn
€-supras and ECB purchases: ECB will conduct ~€80bn net & ~€100bn gross
supranational purchases in 2020 under current programmes; risk biased
towards higher purchases on PEPP upsizing
Source: ECB and .
Morgan
* Our economists expect the ECB to announce at June meeting the upsizing of PEPP to a total
of €, to be used flexibly until the end of 2021. We assume around €1- of PEPP to
be used in 2020. We also assume that 10% of public sector purchases under PEPP goes
towards supras. Source: ECB, . Morgan
14 PEPP+PEPP net PEPP+PEPP net
upsized*
12
10
8
6
4
2
0
Jan 15 Jan 16 Jan 17 Jan 18 Jan 19 Jan 20
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ECB will conduct ~€80bn net & ~€100bn gross supranational
purchases in 2020 under current programmes
JPM estimate of ECB net and gross purchases of Euro area central
government & supra bonds under PSPP and PEPP programmes; €bn
JPM est. of net cash purchases of
central govt. bonds
JPM est. of PSPP
reinvestments of
central govt.
bonds
Gross ECB purchase
est.
2020 total Apr-Dec monthly
avg.
PSPP PEPP Total PSPP PEPP Total 2020
Monthyl
avg.
2020
Apr-Dec
monthly avg.
German
y
France
Italy
Spain
Netherland
s Belgium
Austria
Finland
Ireland
Greece
Portugal
Others
39
41
37
24
10
8
5
4
4
0
5
8
82
87
79
51
22
16
11
9
8
12
11
17
121
127
116
75
32
24
16
13
12
12
16
25
3
4
3
2
1
1
0
0
0
0
0
1
9
10
9
6
2
2
1
1
1
1
1
2
13
13
12
8
3
3
2
1
1
1
2
3
32
30
34
19
7
5
3
2
3
0
3
2
3
2
3
2
1
0
0
0
0
0
0
0
153
157
150
94
39
29
20
15
15
12
19
27
15
16
15
9
4
3
2
2
1
1
2
3
Total sov . 184 405 589 16 45 61 141 12 730 73
Supranationa
ls
24 53 77 2 6 8 24 2 100 10
Total 208 457 666 19 51 69 164 14 830 83
ECB will conduct ~€80bn net & ~€100bn gross supranational purchases in 2020 under current programmes (€750bn PEPP + €20bn/m APP + €120bn temporary APP envelope);
we see risks biased towards higher purchases on PEPP upsizing as our economist expect the ECB to announce at June meeting the upsizing of PEPP to a total of €, to be used
flexibly until the end of 2021
We assume that 10% of public sector purchases under PEPP goes towards supras, similar to PSPP. The first PEPP purchases detail release in early June will give further clarity
on supra proportion under PEPP
We also believe that the ECB will use the flexibility under the PEPP programme towards the supra purchases in case there are excessive distortions, likely created due
to upcoming supply in EU and ESM
Supply vs. QE dynamics for €-SSAs would still be favourable in 2020 under our base case scenario
of PEPP upsizing
. Morgan estimates on €-supras supply vs. ECB purchase dynamics; €bn
€-supras supply vs. ECB purchase: heavy PEPP+PSPP purchases will
likely offset increasing supply pressures, especially under our central
scenario of PEPP upsizing
€-denominated supra issuance 2015 2016 2017 2018 2019
2020f current 2020f
upsized PEPP*
PEPP*
Gross bond issuance (a)
Bond redemptions (b)
64
52
72
54
85
50
74
60
52
50
110-205
59
110-205
59
ECB net cash purchases (PSPP+PEPP,
c) ECB reinv estment (d)
ECB gross cash purchases (PSPP+PEPP,
e=c+d)
60
0
60
81
0
81
66
3
69
23
14
37
3
19
21
77
24
101
110
24
134
Supply ex ECB purchase "stock " measure (f-a-
b-c)
Supply ex ECB purchase "flow " measure (g=a-
e)
-48
4
-63
-9
-31
16
-8
38
0
31
-25/70
10/105
-59/36
24/72
* Our economists expect the ECB to announce at June meeting the upsizing of PEPP to a total of €, to be used flexibly until the end of 2021. We assume
around € of PEPP to be used in 2020
Note: Supply ex QE ‘stock’ measure = Gross issuance – redemptions – net QE (. the number published by the ECB) and Supply ex QE ‘flow’ measure =
Gross issuance– net QE – QE reinvested. Source: ECB, . Morgan
The supply vs. QE dynamics for €-supras will likely deteriorate in 2020 relative to previous years under current ECB purchase programme if the 2020 €-supras
supply comes towards the upper-end of our forecast, . decent uptake from the ESM PCS and EC SURE
In case the ESM PCS uptake remains quite low then the supply vs. ECB purchase dynamic will be quite favourable in 2020
Under our central scenario of ECB upsizing PEPP to a total of €, to be used flexibly until the end of 2021, the supply vs. ECB purchase dynamics will
improve dramatically even in the upper-end supply scenario
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QE redemptions and gross purchases: redemptions to start picking- up in
June and will be very heavy in July, pushing gross purchase pace higher –
positive for €-supra markets
Memo:
Source: . Morgan
* Our economists expect the ECB to announce at June meeting the upsizing of PEPP to a total of
€, to be used flexibly until the end of 2021. We assume around € of PEPP to be used
in 2020. We also assume that 10% of public sector purchases under PEPP goes towards supras. **
Gross monthly PSPP supra flow is defined as sum to net PSPP monthly supra purchases (as
reported by the ECB) and PSPP monthly supra reinvestment amount (. Morgan estimate).
Source: ECB, . Morgan
EFSF EIB ESM EU Other Supras
Jan-20 0 0 0
Feb-20
Mar-20 0 0 0 0
Apr-20
May-20 0 0 0 0 0
Jun-20
Jul-20 0
Aug-20
Sep-20 0 0 0 0
Oct-20
Nov -20 0 0 0 0
Dec-20
2020
Gross €-supra purchases could be higher than €12bn in July
under current PSPP+PEPP programme due to heavy
redemptions
Monthly gross** and net PSPP supranational purchases; .
Morgan forecast in grey from March 2020; €bn
PSPP supra redemptions will be very heavy in July
. Morgan estimate of €-supras PSPP redemptions profile; €bn
20 PEPP+PEPP gross PEPP+PEPP gross
upszied
16
12
8
4
0
Jan 15 Jan 16 Jan 17 Jan 18 Jan 19 Jan 20
2019
11
Gross €-supra purchases could be higher than €12bn in July under current PSPP+PEPP programme due to heavy redemptions
In case the PEPP is upsized at the June ECB meeting, gross €-supra purchase pace could be €13-14bn in June even higher than €15bn in July
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€-SSAs have been busy on the issuance front since the start
of the year
Gross monthly €-denominated marketable bond* issuance for selected
Supranationals & agencies; JPM forecasts for 2020; €bn
Limited 10Y+ supply YTD in €-SSA space and we
expect it to remain low going forward also
Monthly €-denominated gross issuance of €-SSAs in ultralong
sector (11Y+); €bn
YTD €-SSA €-supply: limited 10Y+ issuance and expect it to stay low
going forward also
7
6
5
4
3
2
1
0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
* Marketable bonds include conventional bonds, inflation linked bonds, floater
bonds, zero-coupon bonds, EMTNs. Exclude T-bills.
Source: Bloomberg, . Morgan
12
2018 2019
2020
6
4
3
3
3
3 3
2
2
1
0
1 1
1
1
0
0
0 0
0 0 0 0 0
1
00 0 0
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Gross
Supranationals Agencies
EFSF EIB ESM EU KfW CADES
2018 28 25 15 5 46 1
2019 20 23 8 41 3
Jan-20 3 8 0 0 7 0
Feb-20 0 3 5 0 6 1
Mar-20 2 3 0 0 4 0
Apr-20 5 8 0 0 6 0
May -20 (mtd) 0 1 2 0 0 0
2020 (ytd) 10 23 7 0 23 1
Net
Supranationals Agencies
EFSF EIB ESM EU KfW CADES
2018 4 9 2 -1 16 -3
2019 -1 0 3 -1 13 -10
Jan-20 -5 2 0 0 -3 0
Feb-20 0 3 5 0 4 1
Mar-20 2 0 0 0 2 0
Apr-20 1 3 0 0 6 -4
May -20 (mtd) 0 0 0 0 0 0
2020 (ytd) -2 8 5 0 9 -3
€-SSAs: EFSF, ESM, EU, EIB, KfW and Cades (wtd. average) Source:
Bloomberg, . Morgan
Historical €-SSA bond supply
Supranationals Agencies
EFSF EIB ESM EU KfW CADES
2008 - n/a - 2 34 3
2009 - 43 - 7 33 16
2010 - 26 - 3 32 5
2011 16 35 - 29 40 19
2012 45 40 - 16 38 20
2013 58 35 10 0 31 9
2014 35 24 15 4 26 11
2015 13 21 24 6 23 3
2016 14 29 25 5 25 6
2017 49 26 12 1 42 4
2018 28 26 15 5 46 1
2019 20 23 8 0 41 3
Average 31 30 15 6 34 8
* Marketable bonds include conventional bonds, inflation linked bonds, floater bonds, zero-coupon bonds, EMTNs. Exclude T-bills. Source:
EFSF, EIB, ESM, EU, KfW, CADES, . Morgan
Gross annual €-denominated marketable bond* issuance for selected SSA; €bn
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14€-SSA market trading themes
22$-SSA market update
£-SSA market update 26
Appendix 38
All exhibits shown in the presentation are sourced from . Morgan unless otherwise stated
2€-SSAs & COVID-19 response – supply, QE
€-SSA spreads outlook: turn OW €-supras via long ESM or EU vs. swaps
and stay OW German regional bonds
Note: ASW = bond yield
– maturity matched swap
yield.
* (YTD Max–
current)/(YTD Max–YTD
Min).
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EFSF and EIB has almost fully retraced back to pre-COVID-19 levels
whereas ESM, KfW, NRW and especially EU have lagged
Current level and YTD statistics for 10Y €-SSA ASW; bp
€-SSA markets have been on a roller coaster ride since the COVID-19 outbreak in Europe since
early February, as €-SSA spreads vs. swaps and also vs. Germany widened sharply along with intra-
EMU spreads until mid-March and have tightened back aggressively post the ECB PEPP
announcement on 18 March
Going forward we remain broadly constructive on intra-EMU and €-SSA markets as we remain
confident that the recent ECB/EU actions have been a game changer as they have created a very
strong safety net for these markets
EFSF and EIB has almost fully retraced back to pre-COVID-19 levels whereas ESM, KfW, NRW
and especially EU have lagged
The recent underperformance of ESM and EU vs. EFSF and EIB on the expectation of sharp
increase in supply in coming months is quite excessive in our view. We, therefore, recommend
OW in 10Y ESM and EU vs. swaps (see slide 16)
We also hold OW in German regional bonds via long 5Y NRW vs. Germany as we find current
pick-up excessive given liquidity and supply vs. ECB purchase considerations (see slide 17)
We move longs in KfW vs. France from 4-5Y to 2-3Y as a cheap risk-off hedge (slide 18)
20-
May
3Q20 4Q20
vs. swaps
EFSF -8 -11 -16
EIB -13 -15 -18
ESM 2 -13 -18
EU 4 -10 -15
KfW -4 -13 -17
NRW 10 -7 -11
We have a medium term constructive outlook on
€-SSA spreads
. Morgan forecast of 10Y €-SSA ASW spreads; bp
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YTD statistics Retracement
vs.
YTD highs*
Issuer Curre
nt
Average Min Max
EFSF -8 -2 -12 17 86%
EIB -13 -6 -15 11 93%
ESM 2 -2 -14 15 45%
EU 4 -3 -12 8 20%
KfW -5 -5 -13 11 67%
NRW 10 3 -7 24 45%
France 12 0 -11 30 44%
15
. Morgan
* ASW = bond yield – maturity matched swap yield.
Source: . Morgan
vs. Germany
EFSF 24 31 24
EIB 20 27 22
ESM 35 29 22
EU 36 32 25
KfW 28 29 23
NRW 43 35 29
16
Trading theme 1: OW EU/ESM as market pricing excessive supply
pressures; enter long 10Y ESM vs. swaps
We recommend longs in 10Y ESM or EU vs. swaps as we find current pricing of
supply pressure excessive especially given ongoing strong ECB purchases
Valuations: ESM and EU bonds have lagged EFSF and EIB during the post PEPP
tightening move and are still trading 10-15bp wider vs. swaps vs. their pre- COVID-19
levels. Also the recent underperformance has pushed EU and ESM bonds to their widest
levels vs. EIB or EFSF. Typically €-supras used to trade in a tight range (+/-10bp) with
EU, ESM and EIB close to each other and EFSF typically at a small pick-up over other €-
supras due to relatively weaker credit structure
Supply pressures: the relative underperformance of EU and ESM was due to expectation
of sharp increase in supply in coming months on back of COVID-19 policy response.
However, we find the supply pressure discount quite excessive due to few reasons: i) for
EU the earliest supply will hit the market will be in 3Q20 and till that time ECB purchases
will continue at strong pace, ii) for ESM given recent developments on EU recovery fund,
Italy raising more than 20bn via BTP Italia and improving market conditions, we see
increasing probability that the PCS will not be tapped, at least in the near future, making
the supply pressure excessive, iii) as discussed in slide 5, we expect the ESM/EU to also
use range of instruments (T-bills, bonds) and also split disbursements over time to reduce
undue supply pressures
ECB purchases: at the same time ECB net purchases of €-supras will continue at a strong
pace of €8bn/m and could potentially go to €12bn+/m under our base case scenario of PEPP
upsizing in June. Also ~€5bn of supra PSPP redemptions in July will provide further
support to the market. Also as discussed in slide 9, we believe that the ECB will use the
flexibility under the PEPP programme towards the supra purchases in case there are
excessive distortions, likely created due to upcoming supply in EU and ESM
Also our view of intra-EMU tightening in coming months should be
supportive for €-SSA markets
Trade detail: enter long 10Y ESM
vs. swaps; enter long €25mn ESM
Mar30 vs. paying in maturity
matched swap @ . 3M carry:
and 3M slide: 20
15
10
5
0
-5
-10
-15
Jan 20 Feb 20
Mar 20
Apr 20
May 20
ESM and EU bonds lagged EFSF and EIB during the post
PEPP tightening move
10Y EFSF, EIB, ESM and EU ASW*; bp
ESM and EU bonds are trading at their widest levels vs.
EFSF and EIB
10Y EU/ESM average vs. 10Y EFSF/EIB average ASW*; bp
15
10
5
0
-5
-10
-15
2014 2016 2018
2020
* ASW = bond yield –
maturity matched swap
yield.
Source: . Morgan
EFS
F
EIB
ESM
EU
ECB PEPP
announcement
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* ASW = bond yield – maturity matched swap yield.
Source: . Morgan
17
Trading theme 2: stay OW German regional bonds vs. federal bonds; keep long
5Y NRW vs. Germany; close long 10Y Madrid vs. Spain at loss
Stay OW regional debt vs. central government debt in Germany on still
attractive pick-up, ongoing ECB purchases offsetting increasing supply
pressures; hold longs in 5Y NRW vs. Germany
Valuations: German regional bonds have lagged other €-SSA markets, expect EU,
during the post PEPP tightening. NRW-Germany spreads, especially in intermediate
sector, are still trading at the upper end of 2015-2019 trading range. 3-10Y NRW bonds
trading at 40bp+ over Germany are attractive in our view
Supply pressures: as per the latest NRW capital markets presentation, the funding
needs for 2020 will increase from €15bn to €40bn (of which €25bn has been approved
so far). NRW has been quite aggressive on issuance front recently and have already
covered around €20bn of funding needs. We, therefore, expect supply pace to slow
down from recent heavy pace
Ongoing ECB purchases: under current ECB purchase programmes (€750bn PEPP +
€20bn/m APP + €120bn temporary APP envelope), we expect around
€4-5bn/m of net purchases going to German regional bonds (we believe around 20-25%
of monthly German purchases going to regional bonds); we expect ECB purchases to
more than offset supply pressures going forward and support NRW markets. Also under
our central scenario of PEPP upsizing at the June meeting, we expect German regional
net purchases to increase to around €6- 7bn/m, adding further tightening pressure
Also our view of intra-EMU tightening in coming months should be
supportive for €-SSA markets
We close our long standing longs in Spanish regional bonds as the spread has widened
3-4bp this year. We maintain a medium term OW bias on Spanish regional bonds also
for the same reason as German regional bonds
Trade details: keep long 5Y NRW vs. Germany, long €25mn NRW Mar26 vs. short
€ Bund Feb26 @ . 3M carry: and 3M slide: . P&L since
i
n
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p
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(
3
0
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r
y
2
0
2
0
)
:
-
Close long 10Y Madrid vs. Spain; long €25mn Madrid
Apr29 vs. short € Bono Apr29 @ . P&L since
inception (23 May 2019):
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70
60
50
40
30
20
10
0
5Y NRW-
DEM
10Y NRW-
DEM
2016 2018 2020
German regional bonds in 3-10Y are attractive at more than 40bp
pick up over German federal bonds
French, KfW and NRW bonds vs. interpolated German curve; bp
80 Franc
e
KfW NRW
60
40
20
0
2020 2025 2030 2035 2040 2045
Bond maturity date
NRW-Germany spreads, especially in intermediate sector, are still
trading at the upper end of 2015-2019 trading range 5Y and 10Y
NRW – Germany spread; bp
€-SSA underperformed France in recent widening move and
we now find 2-5Y spreads trading at 10-15bp cheap KfW, EIB,
EFSF & ESM bonds vs. interpolated French ASW curves; bp
4Y KfW bonds trading at more than 10bp pick-up over
France are attractive: enter long 4Y KfW vs. France 4Y and
5Y KfW-France spreads; bp
Trading theme 3: OW 2-3Y€-SSAs vs. France offers attractive pick-up and acts as
a risk-off hedge, move longs in KfW vs. France from 4-5Y to 2-3Y
15
10
5
0
-5
-10
-15
-20
-25
-30
-35
-40
2020 2025 2030 2035 2040 2045
Bond maturity
30
25
20
15
10
2-3Y €-SSAs trading at 7-15bp pick-up over France are cheap and an OW acts as
risk-off hedge; move longs in KfW vs. France from 4-5Y to 2-3Y
Valuations: €-SSAs in general outperformed vs. France from the wides reached pre
PEPP announcement in mid-March. The €-SSAs credit curve vs. France bull
flattened, with the 2-3Y spread still trading in 7-15bp range. We find 7-15bp pick-up
of higher rated €-SSAs over France hard to justify on the basis of liquidity premia
Risk-off hedge: given the relative credit considerations at current valuations OW
KfW vs. France also works as a hedge against broader risk-off spread widening.
Historically during period of heightened uncertainty, KfW has benefitted more relative
to France from flight-to-quality flows. We find short- end KfW vs. France fair value
close to flat on liquidity vs. credit considerations
Trade detail: open long 3Y KfW vs. France; open long €25mn KfW Dec22 vs. short
€ OAT Oct22 @ . 3M carry: and 3M slide: 0bp.
Close long 4Y KfW vs. France; open long €25mn KfW Apr24 vs. short
€ OAT Mar24 @ . P&L since inception (4 Mar 2020): .
KfW EIB EFSF
ESM
2Y
3Y
4Y
5Y
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-5
-10
18 Jan 20 Feb 20 Mar 20 Apr 20 May 20
The 10s/30s €-SSA credit curves are trading close to its
flattest levels historically
10s/30s** €-SSA vs. Germany and vs. swaps boxes; bp
Y = X1 -
R² = %
The 3s/10s €-SSA credit curve vs. Germany has moved from trading too flat vs. the level of 10Y €-SSA spread in Mar-Apr to broadly fair now. We have a
modest flattening bias given our view of €-SSA outperformance vs. Germany by the end of 2020
The 10s/30s €-SSA credit curves vs. Germany flattened aggressively during the sharp spread widening until mid-March and has only partially recovered since
then. Although we expect limited 10Y+ €-SSA this year, we still find current level of 10s/30s credit curve excessively flat and have a strong steeping on
the curve
Trading theme 4: modest flattening bias on 3s/10s €-SSA credit curve; strong
steepening bias on 10s/30s
25
20
15
10
5
0
-5
-10
15 20 25 30 35 40 45 50 55 60
10Y SSA vs. Germany; bp
30
25
20
15
10
5
0
-5
-10
-15
-20
2016 2018 2020
* For 3s/10s analysis we use EFSF, EIB, ESM, EU and KfW credit curves.
** For 10s/30s analysis we use EFSF, EIB and ESM credit curves. We exclude KfW/EU due to lack of 30Y benchmark. Source: . Morgan
10s/30s SSA vs.
Germany
We have a 3s/10s €-SSA credit curve flattening bias given
our view of €-SSA outperformance vs. Germany 3s/10s* €-
SSA vs. Germany boxes regressed against 10Y spread to Germany;
bp
19
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ASW* curves for selected issuers; bp
€-SSA ASW curves
Germany France KfW EIB EU EFSF ESM NRW
70
60
50
40
30
20
10
0
-10
-20
-30
-40
-50
2020 2025 2030 2035 2040 2045 2050
Bond maturity date
* ASW = bond yield – maturity matched swap yield
20
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Daily €-SSA analytics package on JPMM and in email
We publish a daily analytics package for €-SSAs on JPMM. The . Morgan daily EUR SSA package provides a snapshot of €-SSA markets. It provides a quantitative
framework for trade idea generation process in these markets, both outright and RV. We currently include the following issuers in the pack: EFSF, EIB, ESM, EU, KfW,
CADES, BNG and NRW.
The package consist of five types of analytics:
• Market summary: a snapshot of current levels and recent market movements including various statistics like carry & slide, mispricing vs. par rates, ASW
curves etc.
• Cash curve directionality and relative value: curve and fly directionality with typical drivers, such as yield and yield curve.
• Mispriced butterfly: analysis of various bond-specific flies under the following constraints: 1) 50:50 duration neutral, 2) duration & cash neutral, 3) level neutral,
and 4) curve & level neutral.
• Yield vs. modified duration analysis: analysing mis-pricings at the long-end (>10Y) part of the curve on duration-adjusted basis (instead of maturity-basis
only)
• Synthetic yield pickup using FX Basis: yield pickup for non-€ investor selling sovereign domestic bonds in a given currency (UST, Gilts or JGBs) and
buying €-SSA bonds, fully hedging the FX risk via cross-currency swapping back into domestic currency
To find the updated EUR SSA package on , go to Research→Rates→Europe and then look under the Analytics panel for EUR SSA package. If you
would like to receive the package via email on a daily basis, please email @ specifying “EUR SSA package”
mailto:@
21
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14€-SSA market trading themes
22$-SSA market update
£-SSA market update 26
Appendix 38
All exhibits shown in the presentation are sourced from . Morgan unless otherwise stated
2€-SSAs & COVID-19 response – supply, QE
1-week moving average of average EIB/KfW and
IBRD/IADB spreads to Treasuries as of 5/15/20; bp
$-SSA spreads outlook: spreads have normalized after reaching multi-
year wides at the end of March and now appear fairly valued after
adjusting for their fundamental drivers
40
30
20
10
0
May 15 May 16 May 17 May 18 May 19 May
20
Source: . Morgan
* Average of 5-year EIB, KfW, IBRD, and IADB spreads to Treasuries
** Regression over the last 5-years, 1-week moving averages
*** Defined as 12 minus month of the year to account for front-loaded SSA supply
technicals Source: . Morgan
3y EIB/KfW
5y EIB/KfW
3y IBRD/IADB
5y IBRD/IADB
5-year USD-denominated SSA spread* to Treasuries
model**; bp
Curre
nt
value
Coeff. T-stat.
Intercept
5y Treasury yield (bp)
5y US Agy z-spread to Treasuries; bp 17
5y EUR/USD cross-currency basis; bp
5y Bobl/UST spread; bp -106
Seasonal factor**; unitless 7
R-squared; %
Standard Error; bp
68%
23
USD-denominated SSA spreads to Treasuries have somewhat normalized after reaching multi-year wides at the end of March
$-SSA spreads to Treasuries are largely driven by Treasury yields, US Agency spreads, the EUR/USD cross-currency basis, the Bobl/UST spread, and seasonality
of issuance, and they now appear fairly valued after adjusting for these fundamental drivers
We think $-SSA spreads are likely to trade range bound to modestly narrower over the course of 2020 as we see scope for Agency spreads to narrow, only
partially offset by a modest rise in Treasury yields
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Central bank sponsorship for new EIB/KfW issues has increased further in
2020. Regionally takedown from European investors has declined
70%
60%
50%
40%
30%
20%
10%
0%
Central banks Banks Asset
mgr/
insurance
/
pension
Others
(Inc.
corporates
)
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Europe Americas Asia Middle East /
Other
* 2020 YTD reflects KfW issues through January and does not reflect any
EIB issues
* 2020 YTD reflects KfW issues through January and does not reflect any EIB issues
Annual average participation in EIB and KfW USD Global
primary issues by investor type*; %
Annual average participation in EIB and KfW USD Global
primary issues by geographic region*; %
39%
35%34
% 32
% 30
%
25%
37%
32
%
27%
201
8
201
9
202
0
2% 2%
4%
Ratio of final order book size to issue size, averaged
annually across KfW benchmark USD deals; unitless
Central bank participation in new issues has increased 6%-pts to 60%
YTD in 2020, while asset manager and bank sponsorship fell 1%- and
5%-pts, respectively.
Geographically, although the takedown by European investors has
declined, they are the largest participants in new-issue deals: their
sponsorship has declined from 39% over 2018 to 34% early in 2020, while
the Asian investor base increased from 27% over 2018 to 32% YTD. The
allocation to domestic investors has declined from 32% over 2018 to 30%
in 2020
KfW deal data show that the ratio between final order book size and total
allocation has risen to an average of in 2019 for KfW USD
benchmark transactions and YTD, far outpacing what we have observed
in recent years
0
3
2
0
3
60
%
54%
2018 2019
2020
42
%
38%
34%29
%
19%
10%9
% 0% 2%
2%
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2015 2016 2017 2018 2019 2020
* 2020 data is YTD as of January 2020
Source: KfW 24
25
We look for a modest increase in aggregate $-SSA funding needs in 2020, but
maturities are expected to increase, and we project -$15bn in net issuance next
year
Annual funding targets for SSA issuers* and 5-year
average; $bn
KfW EIB IBRD IFC IADB ADB Total
2013 87 96 24 14 16 12 248
2014 76 81 51 15 21 14 258
2015 69 69 58 17 19 19 251
2016 81 74 64 16 16 21 270
2017 88 61 56 16 19 29 270
2018 90 71 36 16 20 24 257
2019 90 56 54 13 21 25 259
5-year avg 84 66 54 16 19 24 261
2020E 84 68 55 17 21 25 270
* IBRD and IFC figures as of fiscal years ending in June. EIB and KfW funding
volumes converted to USD based on average EUR/USD exchange rate over the
year
Source: EIB, KfW, IBRD, IFC, IADB, . Morgan
EIB, KfW, IBRD, IFC, IADB, and ADB gross USD-
denominated bellwether issuance* as of 5/12/20; $bn
KfW EIB IBRD IFC IADB ADB Total
2012 28 24 5 2 5 5 70
2013 27 27 11 8 8 6 87
2014 25 28 27 4 10 5 98
2015 30 26 21 2 10 11 101
2016 36 25 35 3 10 11 119
2017 29 18 15 1 12 19 94
2018 24 22 9 4 11 10 79
2019 23 14 15 2 8 12 74
2020 YTD 6 10 19 1 9 13 59
* Includes fixed-rate bullets with notional outstanding greater than $1bn
Source: EIB, KfW, IBRD, IFC, IADB, ADB, . Morgan
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* The World Bank uses a fiscal year ending in
June of each year. Source: Bloomberg
KfW EIB IBRD IFC IADB ADB Total
Gross 27 21 15 3 11 13 89
Maturities 39 25 15 2 11 14 104
Net -12 -3 0 0 0 -1 -15
Source: EIB, KfW, IBRD, IFC, IADB, ADB, . Morgan
. Morgan forecasts for EIB, KfW, IBRD, IFC, and IADB gross and net
USD-denominated bellwether issuance in 2020; $bn
The pace of $-SSA issuance slowed modestly in 2019 as the funding benefit for issuing in USD and swapping back to EUR remains near multi-year lows for
European SSA issuers, on margin reducing issuance in dollars
We project aggregate funding volumes will rise from $259bn in 2019 to $270bn in 2020 and we look for $89bn in gross supply, and given maturities of $104bn,
this implies -$15bn of net issuance
10
0 90 Funding target YTD
funded
80
67
60
45
40
24
20 17
21
0
KfW EIB
IBRD*
1
IFC
*
9
IAD
B
14
AD
B
343433
Annual funding targets and estimate of YTD funding
completed, by issuer, as of 5/12/20; $bn of USD
14€-SSA market trading themes
22$-SSA market update
£-SSA market update 26
Appendix 38
All exhibits shown in the presentation are sourced from . Morgan unless otherwise stated
2€-SSAs & COVID-19 response – supply, QE
27
Yield changes, since 3 Mar; bp
£SSA spreads in 5Y+ sector widened over the past couple of
months…
10
5
0
-5
-10
-15
-20
-25
-30
2020 2025 2030 2035 2040 2045 2050 2055 2060
Kf
W
EI
B
BN
G
FM
S
IBR
D
UKRAIL
Gilt
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ASW* changes, since 3 Mar; bp
20 Kf
W
EI
B
BN
G
FM
S
IBR
D
UKRAIL
Gilt
15
10
5
0
-5
-10
-15
-20
202
0
202
5
203
0
203
5
204
0
204
5
205
0
205
5
206
0
* ASW = bond yield – maturity matched 6s LIBOR swap yield
SONIA ASW* YTD changes, since 3 Mar; bp
…with a similar dynamic in SONIA ASW
25
20
15
10
5
0
-5
-10
2020 2025 2030 2035 2040 2045 2050 2055 2060
* ASW = bond yield – maturity matched SONIA swap yield
Kf
W
EI
B
BN
G
FM
S
IBR
D
UKRAIL
Gilt
28
G
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o
b
a
l
S
S
A
o
u
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o
o
k
Since the BoE restarted QE £-SSA have traded
relatively cheaper vs. gilts
10Y £-SSA ASW * regressed vs. 10Y gilt ASW; past 1Y, bp
Valuations: £-SSA biased narrower on lack of supply pressures
40
30
20
10
0
May 18 Sep 18 Jan 19 May 19 Sep 19 Jan
20
20
10
0
-10
-20
-30
40
30
20
10
0
-40 -35 -30 -25 -20 -15 -10
10Y gilt ASW; bp
* Average of EIB 2028 ASW and KfW 2028 ASW in GBP and average of benchmark 10Y EIB
and KfW in EUR
* Average of EIB 2029 ASW and KfW 2028 ASW
£-SSA ASW have narrowed from the levels seen in mid-
March but remain wide historically
Average of 10Y ASW for EIB and KfW* in GBP and average of
10Y ASW for EIB and KFW in EUR, past 24M; bp
GB
P
EU
R
19 Mar 20 - 20 May 20
y = +
R² =
24%
20 May 19 - 18 Mar
20
y = +
R² =
5%
29
10Y GBP SSA ASW have narrowed from the wide levels seen in mid-March when market function and liquidity were severely impaired…
…but despite the recent moves remain at wide levels historically. A lack of supply pressures should bias 10Y SSA narrower with pace of issuance YTD slower than seen in 2019
Since the BoE restarted gilt QE purchases in March 10Y £-SSA have traded relatively cheaper vs. gilts
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5Y 10
Y
10Y £-SSA vs. gilts are at wide levels historically and
compared to 5Y £-SSA
5Y £-SSA ASW* – 5Y gilt ASW and 10Y £-SSA ASW**- 10Y
gilt ASW; bp
GBP/USD cross currency basis is back at the wides for
the past two years; we see very limited potential for
cross-border GBP issuance
5Y and 10Y GBP/USD cross currency basis; bp
Valuations: 10Y £-SSA trade relatively cheap vs. gilts compared to 5Y;
we go long 10Y £-SSA vs. gilts
60
30
50
20
40
30 10
20 0
10
May 18 Sep 18 Jan 19 May 19 Sep 19 Jan 20
* average of benchmark 5Y EIB and KfW and 10Y EIB and KfW
-10
May 18 Sep 18 Jan 19 May 19 Sep 19 Jan 20 May 20
5Y GBP/USD
xccy
10Y GBP/USD
xccy
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a
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30
5Y £-SSA vs. gilt spreads have retracted around 75% of their COVID-19 related widening however 10Y £-SSA vs. gilt ASW spreads are at wide end of historical ranges and look
wide vs. 5Y
Underperformance if likely liquidity related although with a further BoE QE extension of £100bn in June we expect this relative cheapness of £-SSA vs. gilts could persist
in the short term
However, we see value in owning 10Y £-SSA vs. gilts at current spread levels as a medium term normalisation trade
5Y and 10Y GBP/USD cross currency basis is back at its widest levels for the past 2 years. We see very limited potential for cross-border GBP SSA issuance from EUR and USD
issuers
Broadly similar GBP funding needs in 2020
Estimate of 2019 and 2020 issuance for selected SSA issuers
EIB: gross issuance (all ccy) €10bn higher than 2019 at €60bn; we expect around 13% of supply to be £-denominated, similar to past year trend
KfW: overall gross issuance (all ccy) to remain around 2019 levels of €75bn. GBP issuance opportunistic rather than benchmark program. Redemptions in 2020
modestly lower than 2019 so expect modest decrease in gross issuance to ~£7bn of GBP-supply in 2020 vs. £8bn YTD in 2018
FMS: lower issuance compared to 2019 given £3bn of redemptions in 2020
2020 SSAs £-supply: Overall funding needs broadly similar to 2019
£-denominated bond issuanceAll ccy gross bond
issuance (€) Gross Net
2020 2019 2018 2017 2020 2019 2018 2017 2020 2019 2018 2017
EIB 60 50 60 56 7 6 5 3 0 -2 -3 -1
KfW 75 79 76 77 7 8 4 5 2 3 0 0
Source: EIB, KfW, . Morgan
31
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Cumulative £SSA issuance from selected issuers; 2018-2020 YTD, £bn
£-SSA YTD issuance: slower pace than 2019 so far this year
25
20
15
10
5
0
Jan
6
5
4
3
2
1
0
Feb Mar Apr May Jun
5.
0
4.
5
4.
0
3.
5
3.
0
2.
5
Jul Aug Sep Oct
2018 2019 2020
YTD
EI
B
2017
2018
201
9
2020
YTD
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Nov De
c
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
* Total = KfW + EIB + FMS+ BNG + IBRD
Source: KfW, EIB, FMS, BNG, IBRD, Bloomberg, . Morgan 32
IBR
D
2017
2018
2019
2020
YTD
SONIA-linked FRN SSA supply has been modest so far in 2020
Details of £-SSA SONIA-linked SSA FRN supply in 2018-2020 YTD
The SONIA curve is very flat
1Y spot and forward SONIA, current and stats over the past 12M; bp
SONIA FRN issuance has slowed
80
60
40
20
0
S
o
urce: EIB, IBRD, Asian Development Bank, FMS, IFC, EBRD, EDC, State of Sachsen-Anhalt,
Bloomberg
Curren
t
12M
average
12M
min
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A
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k
Date Issuer Maturity Amount (£bn)
Spread at
issuance
20
18
22-Jun EIB 5Y SONIA+35b
p
27-Sep IBRD 5Y SONIA+24b
p
02-Oct Asian Dev elopment Bank 5Y SONIA+25b
p
20
19
03-Jan EIB 3Y SONIA+28b
p
04-Jan Asian Dev elopment Bank 5Y Tap SONIA+31b
p
07-Jan FMS 3Y SONIA+28b
p
08-Jan IFC 3Y SONIA+25b
p
09-Jan EBRD 3Y SONIA+26b
p
22-Jan EDC 3Y SONIA+29bp
s
23-Jan Asian Dev elopment Bank 3Y SONIA+26bp
s
21-Feb EBRD 5Y SONIA+30bp
s
05-Mar EIB 7Y Not disclosed
07-Mar Asian Dev elopment Bank 5Y SONIA+30bp
s
20-Mar EBRD 5Y Tap SONIA+30bp
s
09-Apr Sv ensk Ex portkredit AB 1Y SONIA+10bp
s
08-May IBRD 5Y SONIA+27bp
s
17-May EDC 5Y SONIA+31bp
s
06-Jun IBRD 4Y SONIA+22bp
s
08-Jul EIB 3Y Tap SONIA+28bp
s
08-Aug EDC 1Y SONIA+7bps
10-Sep EIB 4Y Tap SONIA+35bp
s
11-Sep Asian Dev elopment Bank 5Y Tap SONIA+29bp
s
01-Oct NRW Bank 5Y SONIA+37bp
s
08-Oct NRW 5Y SONIA+38bp
s
06-Nov EBRD 5Y SONIA+31bp
s
07-Nov IFC 2Y Tap SONIA+25bp
s
19-Nov State of Sachsen-Anhalt 1Y SONIA+20bp
s
05-Dec EDC 1Y SONIA+14bp
s
20
20
08-Jan EIB 5Y SONIA+31bp
s
09-Jan EDC 5Y SONIA+33bp
s
09-Jan State of Sachsen-Anhalt 1Y SONIA+20bp
s
03-Feb EIB 6Y SONIA+34bp
s
19-Feb EBRD 3Y SONIA+25bp
s
05-Mar UK Municipal Bonds
Agency
5Y SONIA+80bp
s
-20
1Y
1Yx1
Y
2Yx1
Y
3Yx1
Y
4Yx1
Y
5Yx1
Y
6Yx1
Y
7Yx1
Y
8Yx1
Y
9Yx1
Y
33
SONIA-linked issuance has slowed over 2020
Bank Rate at 10bp and very flat forward SONIA curve
BoE reviewing possibility of negative Bank Rate. Negative SONIA may
discourage SONIA FRN issuance
Yield spread between £-SSA SONIA-linked FRN and compounded SONIA for selected issuers;
bp
SONIA FRNs offer modest pick-up
90
80
70
60
50
40
30
20
10
0
2019 2020 2021 2022 2023 2024 2025 2026
Maturity
NRW Bank
UK Municipal Bonds
Agency
EIB
FMS
EDC
EBR
D
IBRD
Asian Development
Bank IFC
NRW
State of Sachsen-
Anhalt
G
l
o
b
a
l
S
S
A
o
u
t l
o
o
k
Source: Bloomberg
34
Annual £-denominated marketable bond* redemption profile for selected issuers; £bn
£-SSA redemption profile: long term
10
8
6
4
2
0
2020 2021 2022 2023 2024 2025 2026 2027
2028
8
7
6
5
4
3
2
1
0
2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
>2030
2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
>2030
14
12
10
8
6
4
2
0
2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 >2030
6
4
2
0
EI
B
Kf
W
IBR
D
BN
G
UK
RAIL
FM
S
G
l
o
b
a
l
S
S
A
o
u
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o
o
k
* Marketable bonds include conventional bonds, inflation linked bonds, floater bonds, zero-coupon bonds, EMTNs.
Exclude T-bills.
Source: KfW, EIB, UK Rail, BNG, IBRD, FMS, Bloomberg, . Morgan
35
EIB
Dec23
EIB
Sep21
Trade portfolio – enter long in KfW Dec28 vs. gilts, close long EIB
Sep21
TRADE ENTRY EXIT P&L
Long EIB % Jun32
vs.
KfW % Jun32 20-Feb-19 24-May -19 3
Long EIB Sep 21 on
ASW
05-Nov -19 21-May -20 6
20
10
0
-10
15 40
10
30
5
0 20
-5 10
-10
0
-15
Trades closed over the past 12 months
10Y KfW is cheap relative to 5Y; go long KfW Dec28 vs.
gilts
EIB and KfW benchmark 5s/10s ASW curve vs. 5s/10s gilt
ASW; bp
Enter long KfW Dec28 vs. gilts
Go long £15mn KfW Dec28 vs. gilt 1FE28 @
Take profit on long EIB Sep21
Keep long EIB Sep21 on maturity-matched ASW basis @ . P/L since
inception is 6bp
Short end EIB towards tight end of ranges; we take
profit on long EIB Sep21
EIB % Sep21 and EIB % Dec23 maturity matched
ASW; bp
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A
o
u
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o
o
k
-20 -10
-20
May 17 Nov 17 May 18 Nov 18 May 19 Nov 19 May
20
May 19 Jul 19 Sep 19 Nov 19 Jan 20 Mar 20 May 20
36
EIB 5s/10s KfW 5s/10s
£-SSA analytics package: available on
The . Morgan daily GBP SSA package provides a snapshot of £-SSA markets. It provides a quantitative framework for trade idea generation process in these markets, both
outright and RV. We currently include the following issuers in the pack: EIB, BNG, KfW, FMS, IBRD, UK RAIL.
The package consist of five types of analytics:
Market summary: a snapshot of current levels and recent market movements including various statistics like carry & slide, mispricing vs. par rates, ASW curves etc.
Cash curve directionality and relative value: curve and fly directionality with typical drivers, such as yield and yield curve.
Mispriced butterfly: analysis of various bond-specific flies under the following constraints: 1) 50:50 duration neutral, 2) duration & cash neutral, 3) level neutral, and
4) curve & level neutral.
Yield vs. modified duration analysis: analysing mispricings at the long-end (>10Y) part of the curve on duration-adjusted basis (instead of maturity-basis only)
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37
Synthetic yield pickup using FX Basis: yield pickup for non-£ investor selling sovereign domestic bonds in a given currency (UST, Bunds or JGBs) and buying £-SSA
bonds, fully hedging the FX risk via cross-currency swapping back into domestic currency
To find the updated GBPSSA package on , go to Research→Rates→Europe and then look under the Analytics panel for GBP SSA package. If you would like to
receive the package via email on a daily basis, please email @ specifying “GBP SSA package”.
mailto:@
14€-SSA market trading themes
22$-SSA market update
£-SSA market update 26
Appendix 38
All exhibits shown in the presentation are sourced from . Morgan unless otherwise stated
2€-SSAs & COVID-19 response – supply, QE
S&P, Moody’s and Fitch rating calendar for rest of 2019 for
selected issuers;
S&P Moody's Fitch
Su
pr
an
at
io
na
l
s
EFSF 23-Oct 28-Aug 24-Jul
EIB - - -
ESM - 28-Aug 24-Jul
EU - 18-Sep -
A
ge
nc
ie
s
KfW - - -
CADES - - -
G
er
m
an
r
eg
io
ns
Baden-Württemberg 14-Aug 07-Aug -
Bayern 04-Sep 07-Aug -
Berlin - 07-Aug 16-Oct
Brandenburg - 07-Aug -
Bremen - - 16-Oct
Hamburg - - 16-Oct
Hessen 23-Oct - -
Mecklenburg-
Vorpommern
- - 16-Oct
Niedersachsen - - -
Nordrhein-Westfalen 04-Sep 07-Aug 16-Oct
Rheinland-Pfalz - - 16-Oct
Saarland - - 16-Oct
Sachsen 04-Sep - -
Sachsen-Anhalt 18-Sep 07-Aug 16-Oct
Schlesw ig-Holstein - - 16-Oct
Thüringen - - 16-Oct
High rated universe
S&P, Moody’s and Fitch ratings for selected issuers;
Ratings and ratings calendar for €-SSAs
Source: Fitch, Moody’s, S&P
S&P Moody's Fitch
Su
pr
an
at
io
na
l
s
EFSF AA Aa1 AA
EIB AAA Aaa AAA
ESM - Aa1 AAA
EU AA Aaa AAA
A
ge
nc
ie
s
KfW AAA Aaa AAA
CADES - Aa2 AA
G
er
m
an
r
eg
io
ns
Baden-Württemberg AAA Aaa -
Bay ern AAA Aaa -
Berlin - Aa1 AAA
Brandenburg - Aaa -
Bremen - - AAA
Hamburg - - AAA
Hessen AA+ - -
Mecklenburg-
Vorpommern
- - AAA
Niedersachsen - - AAA
Nordrhein-Westfalen AA Aa1 AAA
Rheinland-Pfalz - - AAA
Saarland - - AAA
Sachsen AAA - -
Sachsen-Anhalt AA+ NEG Aa1 AAA
Schlesw ig-Holstein - - AAA
Thüringen - - AAA
Source: Fitch, Moody’s, S&P
39
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Trades closed over the past 12 months
TRADE ENTRY EXIT P&L
Long 30Y ESM v s. Germany 20-Mar-19 23-May -
19
Long 10Y NRW v s. Germany 17-Jan-19 23-May -
19
Long 30Y EFSF v s. Germany 05-Jul-19 31-Jul-19
Long 5Y NRW v s. Germany 17-Jan-19 31-Jul-19
Long 4Y KfW v s. France 20-Mar-19 25-Sep-19
Long 30Y EFSF v s. swap 31-Jul-19 30-Jan-20
Long 10Y NRW v s. Germany 31-Jul-19 30-Jan-20
Long 3Y ESM v s. France 25-Sep-19 30-Jan-20
EFSF Jul48/Jul53 flattener 30-Jan-20 28-Apr-20
Long 4Y KfW v s. France 23-May -19 21-May -
20
Long 10Y Madrid v s. Spain 04-Mar-20 21-May -
20
TRADE ENTRY EXIT P&L
Long EIB % Jun32
v s.
KfW % Jun32 20-Feb-19 24-May -19 3
Long EIB Sep 21 on
ASW
05-Nov -19 21-May -20 6
40
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Disclosures
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Completed 21 May 2020 12:38 PM BST Disseminated 21 May 2020 12:39 PM BST
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