Today the EFSF went ahead with the bond sale it canceled last week. The spreads are not pretty, and they will get worse.
The European Financial Stability Facility revived the 3 billion-euro ($4.1 billion) bond sale it pulled last week even as the region’s sovereign crisis deepened.
The bailout fund priced the bonds due February 2022 to yield 104 basis points more than the benchmark swap rate, according data compiled by Bloomberg. That compares to the facility’s existing 3.375 percent bonds due in 2021 that were priced to yield 17 basis points, or 0.17 percentage point, more than swaps when they were sold on June 15, Bloomberg data show. A basis point is 0.01 percentage point.
The relatively high spread on the new issue “is a complete level-changer, a completely new world for the EFSF,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “This will be the new reference point” for any future 10-year deal, he said.
The EFSF’s existing notes have underperformed European benchmark debt, with the extra yield over governments on its 3.375 percent 2021 bonds widening to 167 basis points, the most since the notes were sold, Bloomberg Bond Trader prices show.
Bear in mind no one knows how this new EFSF even works, how much leverage it will use or how big the guarantee is. Why anyone would want to buy it is a mystery.
“You’re being asked to invest in something that could change shape relatively radically” said Richard McGuire, a senior fixed-income strategist at Rabobank International in London.
Mike “Mish” Shedlock
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