New European Financial Stability Facility Bonds Expected to Yield 70 BPS Over German Bunds


New EFSF bonds are expected to be priced by investors with a yield 70 basis points above the German sovereign bond.

This is according to a research note by Citi's Peter Goves, as reported by Tracy Alloway in the Financial Times Alphaville.

Goves explains, in an excerpt:

"The EFSM makes available €60bn from the European Commission, drawn from the EU budget. A key difference between the forthcoming EFSF bond is that the EFSM is an EU-wide mechanism and can be drawn upon by any member state."

As Alloway points out, the price/yield on EFSF will serve as a sort of proxy for investor sentiment on the fiscal health of the overall Eurozone.

Interestingly, the EFSF is actually not a classical super-sovereign entity—but a special purpose vehicle, as Goves goes on to explain:

"The EFSF in contrast is a vehicle (a Luxembourg-registered company) backed by (eurozone) intergovernmental guarantees of €440bn. In order to achieve AAA status, the EA member states guarantee 120% of their allocation for each bond1. What matters from an interest rate strategy perspective is what discount over existing curves investor might require to buy the debt given the uncertainty of the precise mechanics of the EFSF and what its future might hold."

One of the interesting facets of the yield analysis is the breakdown structure of the guarantors.

For example, when calculating the yield as a spread over the bund—which is expected to price at +70 BPS—it's interesting to note that the Germans are providing over 27 percent of the capital commitment for the backstop.

Furthermore, all of the EZ member states have agreed to commitment guarantees—even the PIIGS nations.

So, in effect, all the member states simultaneously are both potential beneficiaries as well as guarantors.

It's enough to give you a touch of vertigo.


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