TRANSCRIPT: Interview with AFT’s Anthony Requin on 13 April 2021

21 April 2021

By David Barwick – FRANKFURT (Econostream) – Following is the full transcript of the interview conducted by Econostream on April 13 with Agence France Trésor Chief Executive Anthony Requin:

Q: The yield curve is relatively flat; is it the intention to continue to extend debt maturity? Any thoughts of following Austria into 100 years?

A: The first thing to state is that we don’t have any particular appreciation on the slope of the yield curve. I mean, we don’t have a view on market or yield evolution, as a starting point. Nor do we have any objective, implicit or explicit, with regard to the optimal maturity we should reach. Our strategy in terms of issuance has always been to meet the investor demand at any point in time as it materialises. So if investors are willing to receive long-dated securities, then provided that we are on the market segment on which we are able to provide this and to achieve the desired level of liquidity, then we are keen to offer investors the product they are looking for (and ready to pay for). With this kind of approach, the average maturity of French debt is less a choice made by us as issuer than it is a consequence of how investor demand materialises. In general, it also reflects the structure of our investor base and the underpinning structure of the savings that the various investors have to manage. In the context of major asset purchase programmes with the rate curve translating to the south, it’s clear that some investors were ready to run a bit more risk by buying longer maturity bonds in order to achieve a certain level of absolute yields. And so since 2015 we have gone along with this movement, and that’s why as a result, the average maturity of the debt we issue each year has progressively increased. Before 2015 it was around eight years, versus around 11 years today. But we are simply following investors’ demand; we are not the ones who decide where our sweet spot is and proceed from there. Some issuers that have a smaller issuance programme might have more flexibility in developing another approach, but as a big and frequent issuer with the size of our programmes (€260 billion in 2020 and 2021), this is not something that we are developing. We adapt our issuance pattern to the behaviour of investors, and we are keen to offer tenors with which we can comfortably reach an appropriate level of liquidity, and for that we need to ensure that the products we are offering are able to meet regular demand. And from that perspective, we have decided that our curve can support an extension up to the 50-year maturity. It’s not a very deep market, but nevertheless it’s a market where, by issuing a new tenor every five years, we are able to reach between €15 and €20 billion outstanding on such bonds, with time passing of course, and after a syndicated transaction the bonds being retapped. And so that means we are able to ensure an appropriate liquidity on those tenors. Going beyond the 50-year point, I think it’s more difficult. It’s quite interesting from that perspective to see the choices made by other issuers. I’m thinking in particular of the UK DMO, which, despite being in a market structure where there is a very strong and powerful pension fund industry (whose liabities are supposed to be the longest and so prone to seek long-dated bonds), has not gone beyond the 50-year point, and in particular has not gone to the 100-year point. In our case, with a pension fund industry - which would be the most likely to buy this kind of assets - that is much tinier in terms of size, we have come to the conclusion that there is no sufficient structural demand from real money investors to nurture liquidity of 100-year points. 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, 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. And the result of the new 50-year we launched in January, the OAT 2072, is a testament to the balance that we have been able to achieve. It was a successful transaction and we will remain there for the moment. Of course, we don’t know what will happen in the future. Maybe there will be one day medical discoveries that double life expectancy, and then you have pension funds looking for increased duration. And then maybe the relevant equation will move. But it has not moved since 2005, so for the moment we stick to our current approach.

Q: Are there any particular investor segments that you feel are under-represented in OATs? Any plans to capture them?

A: I don’t think that there is any missing element in terms of geographical or institutional investor type. We have a good coverage. Of course we are always paying attention to market trends. I think the example of what we did with the green bond is a good example of this approach. At some point – and of course under the guidance of our political authorities – we were invited to work on that segment, but it proved to be a dynamic segment in terms of investors developing such an approach. So in terms of diversification, not issuing green bonds would have probably led to missing an opportunity. So we have been innovative, being the first sovereign to issue for benchmark size (€7 billion for a 22-year maturity bond in January 2017) in the green space. And the success of this transaction and the success of the outstanding deals on that segment have generated some emulation – several other sovereign issuers have followed our path. Which is not bad at all. On the contrary, it proves that the structure we put in place and the market trends were appealing. And so at the current stage I don’t see any market segment missing that is sizeable enough and by nature can generate a regular demand and is able to generate liquid bonds. One could think about foreign-denominated bonds, for example. But as a sovereign, like many other big OECD sovereign states, we issue only in our own currency. So we are not issuing in foreign currency, and that may be one element where you could say there’s a market segment you could still take advantage of. But starting to issue in foreign currencies illustrates a kind of opportunistic issuance strategy, because you never know whether the cross currency basis swap will be in the right direction so as to generate savings with regard to a counterfactual issuance in your own currency. I can understand that some non-frequent issuers do that, because they are more opportunistic by nature and have the flexibility to go into different currencies. But a frequent issuer, a sovereign state that has to issue very regularly and that makes a promise to the market about the easy liquidity of its bonds, would not be able to fulfil that promise at any time if he started to issue in foreign currency. Because then if the basis swap doesn’t evolve in the right direction, he will stop issuing in foreign-denominated bonds and will not honour the promise of offering liquidity on his curve.

Q: France has always been innovative leading the European inflation-linked market and is now at the cutting edge of green issuance. What’s next? GDP-linked bonds?

A: We are proud of being seen as an issuer that is not afraid of innovating from time to time, but we will never innovate just for the sake of innovation or generating headlines. Innovation needs to meet the market test. And the market test for us is always whether a product is able to meet regular, structural, real-money investor demand. And from that perspective, there are niche products that we are not sure will be able to meet the market test. But this also depends on the evolution of regulation. Today, for example, there is not a natural demand for GDP-linked bonds. There can be a market niche for them, for example when you have debts that are being restructured. If you’re not in this specific case, regulations currently are not encouraging investors to buy this kind of product. Asset managers can invest in equities, asset managers can invest in bonds, they can invest in linkers, and through a combination of all this, you are able to more or less replicate the GDP index or the value of the evolution of GDP. As long as this will be the case, I don’t see this market developing beyond its niche. So we are very keen to innovate, but not for the sake of innovation.

Q: Can you share any thoughts regarding syndication plans for 2021?

A: In our December indicative state financing programme, we indicated that potentially three operations would come to fruition this year: a new 50-year, a new green bond and for the second half of the year, a new 30-year maturity. The first two have been issued already, so there remains just one syndicated transaction, the new 30-year to take place in the second half if market conditions allow it. Normally we do not depart from the information provided in the December indicative state financing programme, unless of course there is a big macro event that forces us to revise dramatically our plans. Which was the case last year with the Covid-19 crisis, where we had to modify our issuance plan in the course of the year to be able to meet the increased financing requirements stemming from the evolution of the state deficit. But at this stage, there is not such uncertainty, so we have only one 30-year transaction left. 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. And so we were forced by the success of the 30-year issuance and the outstanding amount reached at the end of the year, after several auction taps, to create a new benchmark every year. And so this year we will again consider a new 30-year.

Q: You mentioned the potential for a major macro event to lead to a change in plans; would BTFs bear the brunt of any potential additional issuance needs this year or would you prefer to use the bond market?

A: It really depends on the size. The BTF market is a very deep market in which there remains considerable absorption capacity. 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 for that and will cope with the expected financing requirements in these markets. Of course, the bigger the shock is, the more inclined we are to absorb the shock partly through the bond market. But this is just an example in terms of order of magnitude, I don’t want to precommit.

Q: Regarding ECB QE, has this had any noticeable impact upon liquidity and market functioning? For instance, has the Primary Dealer repo facility been used more often, are dealers asking for taps of off-the-runs more often?

A: Bond scarcity has not really been an issue on the French market, probably because we have not found ourselves in a situation where we had to reduce our issuance program. But the fact is that we have not been confronted with this issue of scarcity, even when the ECB’s public sector purchase programme was operating at full regime. The repo facility that we have put in place has barely been used. All the more so that the Banque de France as well has put in place a repo facility. So there’s been no disruption in terms of market liquidity. And it’s all the more true that in line with our issuance behaviour, we are keen to reissue all dated maturities, not only benchmarks but also off-the-run bonds, if there is demand from the market for them. And the fact is that over the past years, off-the-run bonds have represented between 15% and 40% of total issuance depending on the year. So at times when the central bank was very active in buying the 50 OAT points that are on the curve in order to shift the yield curve downwards, we were of course ready to reissue older bonds so that the negative inventories of primary dealers could be filled. And I think that explains why bond scarcity has never been an issue for us.

Q: What are the potential challenges going forward that could lead you to adapt issuance styles?

A: In the short term, I don’t see any. We’ve been through several crises over the last 20 years, and this in the middle of a lot of evolution in the regulations applicable to primary dealers and investors. The consistency of our issuance has always been very smooth and effective. So in the short run, I would say I don’t see any challenges. Now, if I consider this in a longer time frame, it will be interesting to see what technological disruptions could take place and change the model we operate by. It’s something we need to monitor, but at this stage, our model of issuance works well.

Q: Going forward, will you follow a similar book-building process as with the Green 23y OAT syndication and actively engage with investors to avoid inflated orders? Do you envision taking other steps to deal with the problem?

A: The increasing size of order books is an evolution that has gradually become more noticeable since 2017. I think we are not the only issuers to have noticed it. In the beginning, we took a benign approach, since from one year to another it was not dramatic. But in the very last years, the trend has tended to reinforce itself, to the point where it’s started to be a problem, in particular in the way our operations were interpreted in the media, in the political sphere, in some academic circles – people not necessarily very familiar with the functioning of a syndication or order books and who don’t know the inside dynamics, but who simply think, ‘Wow, they’ve got a €75 billion order book for a 50-year that was priced at 0.59%, and so that means they could have done a lot more.’ And that’s the point at which we start to think there’s a problem, because of the misinterpretation of the information. And that’s what triggered our willingness to stop the dynamic. There was nothing to criticise investors for, because I can understand why they were pushed to act as they did in the order books. When you fill, for the sake of the example, 6% to 7% of a €7 billion transaction to hedge funds, for example, then that means that as a hedge fund, you are competing with other hedge funds on a portion that is quite limited, and you know we are not allocating a lot of bonds to this type of investors. Then if you are competing with others for a €700 to €1 billion slice of the pie, and if the allocation is only a function of the size you have entered in the order book, then you are inclined to increase your order, because it’s the only way to get a preferred allocation compared to your hedge fund competitors. But because of the considerations I mentioned, we decided it was necessary to engage with them in order to avoid that kind of misperception. And I am happy with the way we dealt with the issue during the recent OAT 2044 green bond syndication, where the size of the order book shrunk sizeably compared to the OAT 2072. We moved from €75 billion to €36 billion, which is more appropriate. It’s already giving a good indication of the diversity and size of the interest from the investor base. And since it worked, at least partially, I think we’ll be keen to replicate that approach for upcoming syndications. And the 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. 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. 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.

Q: Would you consider collaborating in this respect with other issuers?

A: We are of course ready to explain our reasoning and how we have behaved to other sovereign issuers, especially in the euro area. In the euro area there is a specific group, the Economic and Financial Committee's Sub-Committee on EU Sovereign Debt Markets, where I and my counterparts from other euro area countries meet at least once a quarter. It’s an occasion to exchange views and experience with market evolution and to discuss common issues. I’m sure this particular issue is something we will discuss in the coming months, because it’s something we have not been the only one to be confronted with.

Q: The March 16 sale of green notes reflected France’s leadership status in this area. At the same time, competition is mounting, with green bond sales to finance the Next Generation EU recovery fund likely to top both your results and those of Italy recently. How will this increasing competition affect your approach?

A: From the start, we realized that we were innovating in this space, being the first sovereign to come to that market for benchmark size. And also because of the ultimate goals of this, which is demonstrating that capital markets can be a very efficient tool to finance energy transition in the wake of the COP 20 and the Paris Agreement. And so from the outset, we have been very keen to share our experience with others. We have been engaged from a very early stage with different sovereign issuers to share that experience. I remember holding meetings with a sovereign state in South America that was entering that market and keen to learn how we had structured our transaction and how the governance had been organised around it, working with different ministries and identifying green-eligible expenditures. And so we are very happy about what has become of a market that was once a niche. There was a lot of caution or even doubt at the beginning. I remember presenting our transaction at an OECD gathering back in 2017 on the occasion of our first entry into that market. A lot of issuers were saying, ‘Well, no, that’s a niche, we don’t consider it a very dynamic market. We try to stay away from that.’ And I said, ‘Of course I can understand, I had the same reservations myself about so-called sectoral bonds before deciding to issue a green bond. But let me tell you, if there is political pressure, and there might be because of the ultimate goals and the ultimate objectives of energy and the ecological transition, then you will be keen to consider the structure that we have put in place.’ I am quite happy to see that this trend is now being participated in by all the debt management offices that came to the debt market. And it’s not the end of the story, and I’m still hearing of a few states preparing transactions and preparing initial offers on the green bond market. It’s a desirable competition. First, because of the ultimate objective, but also because a market that was initially considered a niche has been able to take advantage of the development of several issuers. The more players you have in a market, the more liquid it is and the more efficient it is. So we are keen to share our experience. For example, we are inviting several states to attend our so-called Green Bond Evaluation Council, which we put in place to produce environmental ex-post assessments of the expenditure we are funding with our green bond issuance. I think it’s a level of transparency that we owe to market participants, and which proves that there is no greenwashing in any sense. And we’ll be continuing to have this very transparent and positive approach going forward.

Q: France has green projects that can be fund from the French government budget or the EU recovery fund. Is there a certain mechanism so that observers can know where that green issuance will show?

A: We will explain what spending will be funded by the Next Generation EU recovery fund, so that everyone can see that there is no risk of double counting in any sense. So the green expenditure that will be funded by EU bonds of course will not be funded by our own green issuance. But fortunately, we have sufficient green expenditure to develop our own green programme. 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.

Q: In terms of your green issuance, what is the impact or potential impact of the European Central Bank’s increasing interest in putting monetary policy in the service of mitigating climate change?

A: From what I’ve read on that topic, it seems to me the ECB wants to take an approach that is based on a risk analysis, where they decide what paper is eligible for their refinancing operations and what kind of paper they can accept from banks in the repo market. But I have not seen that they are developing a preferred status for green bonds in their public sector purchase programme or pandemic emergency purchase programme. So from that perspective, I don’t think that there will be a bias in favour of green bonds in the way the ECB conducts its purchases. So for the moment, based on what I’ve seen, I think the impact is neutral for us.

Q: You’ve come out strongly against the idea of cancelling that part of European sovereign debt held by the ECB. Are you concerned that the idea could nonetheless gain traction and affect how investors perceive France, along with other Eurozone countries, as a safe place to put their money? Have you seen any evidence yet of this occurring?

A: I would not say the idea is becoming increasingly popular. In a democracy, it’s nice to have academic debates. From that perspective, this was really a rather theoretical, academic discussion. I think it’s good that from time to time you revisit some issues. And then, quite rapidly, there comes the very good rationale for honouring your debt and not defaulting. That’s what this debate has brought. First of all, when you are a country running a primary deficit of more than €100 billion, then you can’t afford to default. Because then you are inflicting on yourself such great damage that you are forced to balance your budget at a one-year time horizon. So it’s the biggest austerity programme you can ever imagine. And so simply by discussing this issue, you understand why a country like France has not defaulted in two centuries and has one of the best credit histories in the OECD world. Also, when you exchange arguments, you understand very rapidly that this would be contrary to European Treaties. So you would have to change the Treaties. Those who are supporting this idea are coming from a very limited range of the political spectrum. I don’t see this view becoming a majority view in France or in any country in the Eurozone, and since unanimity is required to implement Treaty change, I think the debate is over and you can come to the true core questions: what is the multi-year strategy to balance budgets, what spending needs to be reined in, what spending can be developed, etc.? And these are the more interesting questions than the one about defaulting on the debt.