TRANSCRIPT: Interview with Dutch State Treasury Agency’s Elvira Eurlings on 04 June 2021

9 June 2021

By David Barwick – FRANKFURT (Econostream) – Following is the full transcript of the interview conducted by Econostream on June 4 with Elvira Eurlings, head of the Dutch State Treasury Agency:


Q: How concerned are you by the competition from EU issuance?


A: Lately the EU has been present in the market since the beginning of the EU SURE issuance and we will obviously see more of them ahead. It’s an additional supply of AAA paper, but what we have been seeing at the same time is that there is a significant demand by investors for highly rated government paper. So we don’t feel that there’s been any impact on our auctions so far. We are in discussion with the Commission, which informs the DMOs about their activity and their plans, and I think it’s important that there’s some coordination when one goes to the market. But I think in general there is sufficient demand for AAA paper. Hence, we’re not concerned about possible competitive effects.


Q: Are there any investor segments not being reached that you’d like to reach?


A: Our investor base is quite diverse, although in the last few years we did want to have a bit more Asian participation. So right before the pandemic hit, we did an extensive road show through Asia to get more interest in participation on their end. But that’s fine-tuning; we really can’t complain about the diversity of our base, even if we are always open to improving it. Just to give you a bit of an idea, looking at the extent to which foreigners hold Dutch bonds, it’s around 43%, with the rest held by Dutch residents, of which, obviously, the Dutch central bank is a big client of ours on behalf of the ECB. So it’s close to 50/50 between foreigners and Dutch residents. And within the investor base, a second point to make is that when we have primary issuance, we have a very specific way of auctioning, the Dutch direct auction. That’s a process that we drive ourselves, so we decide on the ultimate allocation to investors. We always make sure that we have around 70% of the investors categorized as real money investors - pension funds, insurance companies and asset managers - with the remainder hedge funds. So, by deciding on the composition of investors, we try to make sure that there is buy-and-hold in our books, but also obviously sufficient allocation to hedge funds to ensure liquidity and trading. A final point is that when we did our green bond in May 2019, we did see a lot of new investors come to the auction. We also rewarded green investors a bit more than the regular investors. If they could really show green credentials, they got a somewhat preferred allocation. We indicated this beforehand, and I think that played a role in attracting green investors to our book. So through that issuance we expanded our investor base as well.


Q: And when you say you’d like to see more Asian investors, are there any current investors you’d then expect to see fewer of as a result?


A: No, it’s just that I think it’s good to always try for a geographically diverse investor base, and we did see before 2020 that the Asian representation had become somewhat less. Of course, the debt they would have bought is being held by others. We felt that at least we should make an attempt to get the Dutch story out to Asian investors also. We teamed up with one of our primary dealers and visited Asian pension funds and life insurance companies just to get our story out, to show our faces again and to re-establish relationships. That requires maintenance, and it’s unfortunate that we haven’t been able to go out there again the last two years. We hope to be able to return when travel requirements allow it, to always make sure that our story gets told to a diverse range of investors.


Q: How much uncertainty are sources of funding subject to for the rest of the year? Do you envision further issuance revision in Q3/Q4?


A: The impact of the Covid crisis has introduced a lot of uncertainty around the level of funding needs throughout the year. To give you a bit of an idea, just before the crisis, so in January and February of last year, we were looking at a funding need of €40 billion. Towards the summer, we were looking at a funding need of €140 billion. We ended the year with a total funding need of €100 billion. So we had to introduce many more lines throughout the year, and then by the end of the year we had to cancel an auction and some bill programmes. So that gives you an idea of the volatility in the numbers, driven of course by the difficulty of estimating the budgetary impact of measures taken, on both the expenditure and the tax revenue side. In December 2020 we planned, as we always do, the outlook for the coming year, and revise it on a quarterly basis. We are on the verge of publishing our 3Q press release, in two weeks, and I think for this year we see the same level of uncertainty in terms of funding needs. But there have been some lessons learned. For example, last year we really ramped up our money market programme, so we were active on the capital market, but very active on the money market at the beginning of the year, because we thought we were looking at a very big number to be raised. For this year, we said we are committed to raising at least €55 billion on the capital market. The bill programme is not so much ramped up, as we are cautious and want to take a bit more time to see where the numbers really end up and avoid the developments of the second half of last year, when the funding need turned out to be significantly lower. We don’t want to have to cancel auctions and bill programmes again. So we are a bit more cautious in already getting the funding in, and we want to be a bit closer to the quarterly updates. And we always know that if need be, we can be very flexible. We have our bill programme, but also commercial paper – it’s a very liquid market and we know that we have easy access. So, in case needed, we can accelerate incoming funding.


Q: According to your 2021 issuance plan, you will only issue new 10y and 15y benchmarks via DDA. As you have already done these two deals, another DDA in 2021 is not to be expected, correct?


A: Correct, no further DDAs are expected. We are going to issue a new DSL, though, our 8-year DSL, which is a new line. But we will not issue that through a DDA, we will issue it through a tap auction using the MTS system. We did that last year as well when we launched our 7-year DSL, but that was actually driven by operational considerations, because when we do a DDA I need my full staff on the work floor, and last year that was simply not possible, given social distancing requirements. So we had to improvise and used the MTS system to launch a new DSL, which was quite exciting for us, as we’d never done it before. But the experience was very good. It was well received and we feel we can repeat that for maturities up to 10 years. The 10-years are really our benchmark bonds and those you want to do with a full-fledged auction. But since the launch of the 7-year DSL went very well through this MTS process, we will repeat that with the launch of the 8-year DSL. So, no further DDAs this year.


Q: How big has the impact of the ECB’s pandemic emergency purchase programme (PEPP) been for the Netherlands?


A: Obviously, the programmes of the ECB have contributed to lower funding costs. Also for the Netherlands, although we were fortunate to see only very brief volatility in our spreads. They were easily calmed down and I think the ECB has really contributed to that environment. Levels are now at historic lows. Although we do see a rise in interest rates overall in the last few weeks, with higher inflation expectations emerging in the US, and – very much correlated with that – in Europe, but also with better economic projections and vaccine rollouts. And that’s also what we’ve seen in our yield curve, so for a few days we were even above the 0% mark for our 10 year bond, which we were no longer used to seeing, being in negative territory usually. It has returned to those lower levels now, which is good for the taxpayer. So we see such low levels of interest rates and at the same time debt levels have obviously increased, also on our end. The latest projections now show that we are getting in the area of 60% of GDP. That’s an elevated level for the Netherlands, although at the same time if you compare the Netherlands to our peers in the Eurozone, that’s still a very decent and manageable level.


Q: At this point, as the recovery gains speed, does this calming effect matter for the Netherlands? How worrisome is the possibility of ECB support being withdrawn?


A: I think the calming effect has contributed to stability in the market.  For the Netherlands we only saw a very short period of volatility from which we easily recovered, and we were very quickly back at pre-Covid levels. Markets had a positive view of the fundamentals of our public finances and understood that we can manage to address shocks and that we were in very a very healthy state before the pandemic hit us. We had our public finances in order, so we can absorb higher debt levels. We do see the need after Covid to make sure that we build back better and our policy attention is on making sure that the earning capacity of the Netherlands is ensured, that we make the right investments going forward, also to address higher debt levels and financing costs.


Q: It seems debt sustainability is on a good path everywhere, but if the ECB indicates an intention to draw support, then DMOs throughout the area might have to pay much more to borrow. That applies less to the Netherlands, but do you worry for those whose public finances are not in as good order?


A: What I have seen from colleagues abroad is that to the extent possible, they’ve also been active in issuing longer tenors. I think that’s a wise decision, making sure that we all lock in lower interest rates for the longer periods. That’s a way to capture stability in the budget and in costs. But obviously, time goes by and you need to refinance, maybe at higher rates than we’re seeing right now. In the Netherlands, I’m very proud of the fact that although at the beginning of last year we were very active on the money market, obviously with much shorter maturities, we were nevertheless able to extend the average maturity of our portfolio. Because right after the summer we changed from money market-based to much more capital market-based financing. So we also locked in lower interest rates for longer.


Q: So if markets have some reasons not to overreact to a withdrawal of ECB support, then spreads, even for the fiscally weaker members of the Eurozone, don’t necessarily have to widen dramatically.


A: In general, I’ve seen a trend of extending maturities, and that obviously helps. Whether that’s enough to prevent any debt sustainability issues, I don’t know. But it helps.


Q: Would you ever consider doing syndications like other DMOs in Europe?


A: I never say never, and it has certainly been on our radar. Last year we saw that some other DMOs that are normally also not too active in syndications did use syndications, for example to introduce new lines. So, I never say never, but we should be very careful when considering a change in the way that we do our auctions, because the DDA really serves us well; we are in the driver’s seat and determine pricing and final allocation. But also for the investors it’s a very transparent, rule-based way of executing auctions. So it has served us well, and that’s also the feedback that we get from investors. Obviously it’s a unique way of auctioning and not being replicated a lot. So it also always requires a bit of explaining to investors, but at the end of the day we feel that it serves us well. So changing it in the near future is not in the cards.


Q: Are you worried about a shift in demand away from longer-dated tenors?


A: No. We issued the 30-year last year, we tapped it again this year, we issued a 15-year and our 20-year green bond. So I think we have some evidence about what the appetite is on the longer end, and we have not seen any decrease in appetite for longer-dated maturities so far. You need to make sure that you have good coordination amongst one another and you should determine the right timing, but I think from the investors’ point of view, we do still see significant demand. So if I would see that the auctions in the longer end become harder or cumbersome, then we might need to reconsider. But that’s not something that I see is happening right now.


Q: You have previously rejected issuing beyond 30-years; under what circumstances would you reconsider? Were you not going to look into this possibility, given the increased demand from ultra-long-end players?


A: It’s a valid question, and certainly we were clear, also in our outlook, that one of our objectives is to extend the average maturity of our portfolio. From that angle, a longer-dated maturity would fit nicely. But we haven’t issued a 50-year up to now because only in 2020 we issued a 30-year, which is really the longest point on our yield curve, and we had a commitment to bring that level up to a certain amount outstanding, and we are in the midst of doing that. So we want to make sure that we first meet that commitment that we made before. But I think it’s a valid question for us to touch base with the market again. We always look from two angles: what serves us well as a DMO, what fits in our own internal objectives, and what fits the investors. That’s why we launched a green bond in 2019, because the demand was overwhelming. And now we have seen 50-year bonds coming up more often in countries surrounding us. Not all countries; Germany has not issued a 50-year, for example, a country we we also look at closely. So we will hold a new round of consultations in the coming months and see what kind of feedback we get. I’m not a person to say I’ll never do this or that. I think it’s our job to make sure we know what’s happening in the market, where the appetite is evolving towards and what serves us well. That’s always something we need to have an open eye on. But the plan for this year, that’s fixed, that’s what we announced in the outlook. And when we draft up our new funding plan for 2022, we hold a new round of consultations with our investors.


Q: So when you hold a new round of consultations in the coming months, it would be with an eye toward potentially doing it next year.


A: Potentially.


Q: Are linkers off your agenda?


A: I never say never, but some possibilities are a bit more remote than others. I know when I came into office some three to four years ago that question was a bit on the table, but it has quickly gone off the table. In this low-interest-rate and low-inflation environment, we simply have not heard of any significant appetite for it. But again, if circumstances would change and we heard that our investors had increasing demand for it, or that the end investors were really pushing our banks to get them these products, then it’s certainly something that we would need to consider. But I think it’s also important to note that we were a relatively small issuer before Covid. We had an average of €40 billion in funding needs. It’s quite a complex sort of puzzle to make sure that you can issue what the market likes and that you can maintain liquidity whilst also reserving some room for new products. And we were able to do so with the green bond, squeezing it in. So if we were to introduce a new product, which is still possible, then I think the current funding needs would allow more room, but you also need to make sure that whenever you introduce something new you can sustain it and you can provide sufficient liquidity, so we also need a bit of a multi-year planning for that. So linkers: not so much, no.


Q: What can be expected going forward in terms of green issuance?


A: We’re very excited about green. We successfully issued green starting in May 2019 and now have more than €10 billion outstanding. We issued our second impact report last month. Now we’re a bit in a waiting mode for a new government to be formed after the elections. Depending on their agreement and new green plans for the future, we hope to be able to base a new green bond on those green plans. We were always very clear that the green bond issuance should really fit in the green ambitions of the government. And whilst we have positive expectations that we can still continue, that we haven’t done it only once, we really need to wait for the new plans of the new government, and then hopefully we’re ready to go.


We’ve seen quite a few governments becoming active in the green space, in the sustainable space. We are very excited to see more sovereigns playing that role. I really, truly believe that sovereigns play a catalysing role in the market. We heard on roadshows that when the sovereigns became active in the sustainable green space, then the funds managers went out fundraising for green impact funds. And I think that’s real evidence that the sovereigns can play an incredible role there by introducing significant issuance size and a solid asset class to that market. I hope that many governments will join us in that space to make more climate finance available. That would be my encouragement to other countries that may still be in doubt whether they should issue green or not.


Q: Is USD-denominated issuance of interest?


A: Not so much. We have done some quite successful USD launches in the past, when circumstances were different. But I think for now, that’s not what we hear back; we listen quite carefully to our investors, and I would say that for the coming years we would probably be looking at what kind of maturities we should issue and whether we can introduce something green again. I think that is the menu card for us for next year.


Q: And retail issuance?


A: That’s something we’ve never done before and it’s not something a lot of DMOs do. I think it’s quite an operational challenge to do.


Q: Thursday is the ECB’s Governing Council meeting. Are you as a DMO on the edge of your seats? Do you see an immediate impact on your activity?


A: Yes and no. Yes, we are on the edge of our seats. It’s on the big screen in our dealing room and we always follow it closely. That’s part and parcel of what we should do. No, we don’t see an immediate impact on our curve. We have strong fundamentals, so we have not seen that. But those are important pieces of information for us.