NEXT FINANCE : How the French debt is perceived abroad? What is your assessment of the AFT roads shows close to Asian, American or Eastern investors
Philippe Mills : By definition, a debt agency is the body which, by function, will have the most comprehensive point of view of the movement, flow, quantity and price of the State debt. In the case of the French Treasury Agency, this is even truer because we are one of the agencies making more events each year to have direct contact with investors.
We conduct road shows, where we travel to meet investors. In 2011, we were in 38 countries, and meeting one hundred investors. We participate in conferences, fifteen per year, allowing us to see another hundred. We also organize conference calls, as well as reverse road shows where investors move and come meet us in our office. In total, we see live hundreds of investors each year.
We also have flow of information through reports harmonized for Europeans, provided by 20 banks with expertise in Treasury securities. Their mandate requires them to provide us with all information and flows that they observe on the French debt. We obtain detailed information about those who sell and buy French debt.
Levels of French borrowing rates are exceptionally low. How do you explain that?
We found that the French debt has always been appraised by investors. It has always been part of the best rated, most liquid and most diverse debts.
- Crédits Photos : MINEFI / SG © Alain Salesse
There was a slight moment of tension on the French debt, between October and November 2011, but it was in fact on all the debts of the Euro zone, with the exception of Germany. This was due to the perceived problems of governance in the Euro zone. There were no specific fears in France, but rather on the French banks and their exposure to peripheral countries.
In January 2012, when fears have faded, our spread declined significantly. French rates then remained stable with very little movement in prices. Then a further tightening came in, starting from the spring. We ended up with very low rates, defying some analysts’ predictions.
This is explained by the fact that the volume of safe assets tended to decrease during the crisis, first by category of bonds, then bond issuers and then by type of issuers rated. Today a large number of investors are restricted to buy only U.S., English, German, Dutch and French debt. Before, they were used to buy the Spanish and Italian debt. Now they do not buy it, although, due to the actions of the ECB, this situation may change.
Among the buyers of French debt, there are a high proportion of central banks and sovereign wealth funds (about 50%). Then there is a significant part of asset managers, insurers and pension funds.
Philippe Mills
Is there a phenomenon of "redomestication" of the French debt? Who are investors who buy French debt today?
Regarding investors, it should be noted that many of them pose little or no questions about France. This may seem odd, but they mostly have questions about the euro zone and its environment, countries such as Greece, Italy, Spain, the ECB, and the mechanisms of stability and safety, temporary or permanent.
Month after month, through the SVT we get a census of net buyers and sellers of the French debt by investor category and geographic area. There are a high proportion of central banks and sovereign wealth funds (about 50%). Then there is a significant part of asset managers, insurers and pension funds. Then there are the commercial banks, but their share has fallen sharply over the crisis (10% in 2012).
This year, half of the net buyers of French debt come from Asia and the Middle East against 33% in 2011 and 20% in 2010. About 30% of net buyers are from the Euro zone, with a significant proportion of French buyers including many insurance companies. The proportion of French buyers is generally more important for OAT compared to BTANs or BTF, insofar French insurers have a preference for long-term maturities.
There is therefore no phenomenon of "redomestication" of the French debt. It is very diverse, with many purchases from central banks and sovereign wealth funds from countries outside the Euro zone.
Are the issues carried out according to the needs of the AFT or those of investors?
We have two objectives in achieving our issues, maximum security and lowest cost. For a large issuer, such as France, the best way to get them is to have a policy of predictable issuing via regular announcements and regular amounts. You also need to have concern regarding the shape of the yield curve which must be as complete as possible and as liquid as possible on all maturities. Arbitrages must also be possible between maturity and life of the issues. That is how the French curve is prepared!
Our issues are therefore satisfying these criteria. Distribution fits the request via the SVT.
However, during periods of stress, we increase the short-term securities, because we know that there is a significant residual temporary deficit that will appear and we’ll meet through these short-term securities. When the deficit is absorbed, we cut short-term securities, and we return to an average share of short-term securities in the share of overall debt. This is what we do consistently since 2010. We had a peak of 18% of BTF at end 2009, against 15% at end 2010 and 13% in late 2011. We’ll be at 12% at end 2012.
Ultimately, the issue policy is a balance between supply with its characteristics, and the request.
Philippe Mills
Large corporate or sovereign, including Mexico, have managed to issue 50 years maturity securities, with an appetite from insurance companies or pension funds. The AFT has made this type of issue with very long maturity in the past, will you come back?
Yes, we are interested in programs with very long maturities. This is a niche application and we want to serve. We launched the new OAT 2060 in March 2010, with the aim to make 3 billion, we finally issued 5,000,000,000.
We tested again in June and we got 700 million euros at 3.27%, the lowest ever for a50 years maturity. It is also possible that we re-issue this type of maturity even if this should be an enabling environment in terms of volatility.
Moreover, comparison with corporate or sovereigns emerging is not conclusive. Us, when we issue bonds for given maturities, we hope that the points are comparable at all points of the curve. This is not the case for corporate or for emerging issuers.
On the other hand, when corporate issues securities with maturity over 50 years, he gets a few hundred million, this is not quite the same thing. You can, when you issue for 200 million Euros, find one or two investors to end up with your deal. When you issue 3 billion, it takes at least several dozen of investors to close the deal and also those investors have to be a strong buy side.
Inflation remains a major topic for investors; some fear the inflationary effect of the abundance of liquidity in the markets. In this regard, what is your OATi / OATei program?
Probably there is no appetite for inflation but we would rather cautious. There are also risks of recession, and there is a fairly strong oscillation between inflation risk and the risk of disinflation. Moreover, central banks appear to meet their inflation target. For us, OATi / OATei are useful tools but in the context of stable long-term inflation. We built two curves on inflation, one French and one European, as complete as possible, even if they are less complete than the nominal curve.
We regularly announce the amounts to be issued. We always try to issue about 10% for medium-long term bonds indexed on inflation in relation with the total annual program of net redemptions.
We conducted econometric calculations to assess the optimal share of inflation-indexed debt in percentage of the total debt. It is about the benefits for the government regarding the risk premium protection it gives to those who purchase indexed securities in relation to the link between spending and revenues with general inflation. We determined that the optimal stock of debt indexed to be between 10 and 20%. Today we are at 12% from the inflation-indexed debt over total debt, we are satisfied.
Eurex launched futures contract on the OAT. Some politicians were alarmed about a risk of increased speculation in the French debt. Is that your opinion? How do you see this development? Is it positive for the OAT liquidity?
I note that these products have been launched by a private company, moreover German. AFT therefore had no authority to consent to such initiatives. This has not always been very clear in the minds of some commentators. There are futures on German debt, American, English and Italian. So the launch of futures on the French debt is not a surprise.
These tools, OAT futures can improve the liquidity of French securities, at least marginally. Besides, it was found today with more than a million and a half of regular OAT future contracts. Although volumes remain far from volumes of German Bund contracts, they are higher than the volumes on the Italian BTP. This has played a positive role in liquidity, at least at the margin.
In terms of speculative tools, they are not alone, far from it. One can speculate with cash, we can speculate with CDS. And if there is a market promoting speculation, it is that of CDS. By definition, you have a triangular relationship between the futures contract, the cash and repo market. The futures prices are closely linked to the price of cash and repo market. Perhaps they reflect much better trends compared to CDS.
However, this product was launched in April 2012; there was then a kind of decorrelation between French debt and German debt. Today, there is a fairly clear re-correlation. Will the tool (OAT futures) keep its interest? Wait and see.
Have you already run your entire issuance program?
Almost 92.8% of the program has been executed. We issued 165.2 billion euros [1] of 178 billion expected. The goals we set are net redemptions of debt. We repurchased debt significantly in 2010 and 2011, and will continue this policy. The goal is to smooth the amount of debt due to expire, and to ensure that the issues profiles follow at best the evolution of deficit reduction.
Philippe Mills
Some French public issuers, including CADES issue in dollars. This was never the case of the AFT, why?
We are allowed to issue in all the OECD currencies, especially dollars. But before such issuance takes place we should analyzed several criteria. How much do we ask for? Is there a financial justification for a transaction of this nature? Are we going to refinance cheaper in dollars than in Euros? Moreover, it should be ensured that the interested investors do not substitute OAT in Euros against OAT in dollars. The gain would be marginal. We should therefore attract new investors, knowing that our base is already very broad and diverse.
Other more complex criteria under the behavior of financial players should also be studied. How an issue in dollar is perceived by operators and analysts? What signal for the euro market? In addition, because the AFT is under the Ministry of Finance, some observers might interpret this as an issue in dollars of the French government in the context of turbulence in the euro area.
However, as you mentioned, an investor interested in the "France" risk in dollars can subscribe to bonds issued in currency by other public institutions as CADES. You can see a breakdown of roles. CADES in particular, also benefits from the fact that the AFT is not present on this segment to issue in dollars with better conditions.
Do you continue your swap policy?
No, the conditions do not currently exist in terms of rates volatility and levels long-term rate. Swaps policy is suspended but it is regularly examined via analytical market models. The outstanding swaps amount declined significantly and is now 11 billion Euros against 50 billion a few years ago.
Swaps policy was approved by parliament and review by the Court of Auditors with the aim of reducing the duration of the debt. If we want to use it in the other direction, ie increase the duration of the debt, we would have to reapply for approval of the Court of Auditors and the Parliament.
