EXCLUSIVE: Agence France Trésor Head: Prefer 50-Year Maturity as Ultimate Point on Our Curve

21 April, 2021

- Given Marginal Increase in Financing Needs, Won’t Change Medium- and Long-Term Issuance Programme - Indicates Better Treatment for Moderately Sized Orders Than for Trying to Outdo Other Investors

By David Barwick – Frankfurt (Econostream) – Agence France Trésor, France’s sovereign debt issuer, sees little likelihood that it will issue any debt with a maturity of greater than 50 years, according to AFT Chief Executive Anthony Requin.

In an interview with Econostream one week ago, Requin said that without pre-committing, he did not expect the AFT to change its 2021 medium- and long-term issuance plans.

The AFT would continue to counteract the trend towards larger order books by letting relevant investors know that they would fare better if they did not try to outdo others by inflating their demand, he said.

‘[T]he average maturity of French debt is less a choice made by us as issuer than it is a consequence of how investor demand materialises’, he said when asked if he expected to continue to extend French debt maturity, perhaps all the way to 100 years.

The AFT has ‘come to the conclusion that there is no sufficient structural demand from real money investors to nurture liquidity of 100-year points’, he said. ‘On the contrary, we would be at risk of cannibalising to a certain extent our 50-year and 30-year points by issuing 100 years.’

‘So we looked at that proposal a few years ago’, he said, ‘but so far the conclusion has always been the same: we prefer to stick to the 50-year maturity as the ultimate point on our curve, a point where we are comfortable to take the commitment to offer appropriate products to investors and for which we can expect a good response or a good reaction from the market.’

The success of the new 50-year OAT 2072 launched by France in January bears the AFT out in this regard, he said.

Although a major macroeconomic event could force a rethink, BTFs would more likely bear the brunt of any additional issuance needs this year, Requin said.

‘I don’t want to precommit, but I think that being between €10 and €15 billion, given a marginal increase in financing requirements, we will not change the medium- and long-term issuance programme’, he said. ‘Of course, the bigger the shock is, the more inclined we are to absorb the shock partly through the bond market.’

The trend of increasing order book size has in the very last few years ‘tended to reinforce itself, to the point where it’s started to be a problem’, he said, as less informed observers misinterpreted the huge order book size to mean the AFT as issuer ‘could have done a lot more.’

Investors were only responding naturally to incentives, he said, expressing understanding. However, given the resulting misinterpretation, ‘we decided it was necessary to engage with them in order to avoid that’, he said.

‘[T]he approach basically is the fact that we contact the relative value investors to ensure they understand that they are not the core of our target in terms of demand in this kind of transaction, and so they will get a limited portion of the bonds that we issue’, he explained. ‘We recognize that they have a role to perform in nurturing liquidity, so we are keen to allocate to them, but moderately.’

‘And as a consequence of this moderation, we expect them to place orders of a size that is commensurate with what they can expect in terms of allocation to the hedge fund community on the transaction’, he continued. ‘And those that show with their orders that they have understood that will be better served in terms of allocation with regard to the others. So they will be better treated if they place orders of moderate size rather than trying to outdo the others by putting big numbers.’

Since France has green projects that could theoretically be financed either out of the national government budget or the Next Generation EU recovery fund, an account of what is to be funded how will be forthcoming, ‘so that everyone can see that there is no risk of double counting in any sense’, he said.

‘[F]ortunately, we have sufficient green expenditure to develop our own green programme’, he said. ‘And at the same time, according to the Commission’s recovery plan, the green expenditure in the national recovery programmes will be overwhelmingly funded by EU bonds.’

As for syndication plans this year, the AFT would probably stick to the December indicative state financing programme and thus do just one more syndicated transaction in the second half, market conditions permitting, he said.

Although the crisis last year forced the AFT to revise its plans, ‘at this stage, there is not such uncertainty’, he said. ‘What is new is the fact that for the third year in a row, we will issue a new 30-year benchmark. Ten years ago, a new 30-year benchmark was coming every three years. But with the change in the rate environment, with rates being lower, there has been a shift in investor demand towards longer-dated bonds.’

In other comments, Requin said that the AFT was pleased to be regarded as innovative, ‘but we will never innovate just for the sake of innovation or generating headlines.’

‘Innovation needs to meet the market test’, he said. ‘And the market test for us is always whether a product is able to meet regular, structural, real-money investor demand.’

Still, changes in the regulatory environment could mean that today’s niche product one day meets the market test, he said. Barring the specific case of a debt restructuring, ‘regulations currently are not encouraging investors to buy’ GDP-linked bonds, he said.

‘As long as this will be the case, I don’t see this market developing beyond its niche’, he added.