TRANSCRIPT: Interview with Austrian Treasury Managing Director Markus Stix on 18 June 2021
23 June 2021
By David Barwick – FRANKFURT (Econostream) – Following is the full transcript of the interview conducted by Econostream on June 18 with Markus Stix, Managing Director in charge of markets at the Austrian Treasury:
Q: How big a problem for you are inflated syndication orders, and what if anything do you think needs doing about it?
A: This issue concerning large hedge fund orders at syndications is currently being debated among EU debt managers in a working group of the EFC sub-committee on the EU sovereign debt market. I do not want to anticipate the discussions there, but maybe they will lead to recommendations for how to best cope with the situation. Personally, I think that this topic is more of an issue for large sovereigns, and in Austria we are not overly concerned. On the one hand, it is clear that one has to be realistic when judging the success of syndications by order book size only. Most professional market participants know that. Also, it is fair to say that hedge funds play an important role in the EGB market by complementing the traditional buy-and-hold investors and therefore providing liquidity. This has to be taken into account as well.
Q: What modifications to 2021 funding needs do you expect between now and the end of the year? How confident are you in the new projections? Is another funding update expected later in the year?
A: We announced an updated funding plan at the end of May. This forecast, which foresees a slight increase in RAGB funding from a minimum of €40 billion to around €45 billion, and in overall funding from around €65 billion to between €65 and €70 billion, is based on a budgetary amendment in Austrian Parliament from mid-May. However, this amendment is based on economic forecasts from end-March, so there is therefore some room for a positive surprise during the remainder of the year, depending on the economic rebound. At the moment, we do not envisage revising the funding outlook again for this year, but in a situation like this one we must closely monitor what happens during the rest of the year. If the economic rebound continues and intensifies, we would not rule out another update. The Finance Ministry will have new economic forecasts by the end of this month, and will calculate the budget for this year and the following years, and then we can have a closer look as to the funding needs.
Q: And what about uncertainty regarding funding sources?
A: There is no uncertainty in terms of our funding sources. It’s more the opposite case. We have announced that we will introduce a new programme for Austrian Treasury bills in euros under Austrian law. Under this programme, there will be regular auctions, with the first one planned in Q3. And the existing Treasury bill programme, under English law, will be renamed Austrian Commercial Paper Programme for differentiation purposes and in order to be able to address the demand for short-term funding, especially for foreign currency issuance. This decision to create a second short-term funding programme was also made in order to increase Austria’s financial flexibility and further expand Austria’s investor base.
Q: Can you say anything about your syndication plans, including maturities of particular focus?
A: In our updated plan, we left the forecast of three to four euro RAGB syndications unchanged for this year, although we increased the overall range to €65 to €70 billion. This means that there are one or two more syndications possible for the remainder of the year, depending on how funding needs develop. In terms of maturities, we can definitely rule out a new 10-year and a new ultra-long RAGB, as we already issued a new 10-year at the end of January and the 50-year benchmark in April. But there are many other options open to the Republic of Austria if we did decide to issue a new benchmark. But due to the fact that we keep a close eye on the steepness of the curve and the absolute yield level, we cannot pre-announce tenors and volumes for potential upcoming syndications now.
Q: And do you have a feeling now as to whether it would be one syndication or two?
A: This depends on the strength of the Austrian economic rebound and the budgetary execution. If the economic recovery picks up more speed than expected when the budget passed Parliament in May, then we will rather go for only one syndicate transaction. But if things go as seen now, consistent with the announced volume of between €65 and €70 billion, then we would do two syndicate transactions.
Q: Turning to the ECB, how much difference for Austria has the PEPP made? What would the significance for Austria be of ECB support being withdrawn and yield curves shifting up?
A: The PEPP has definitely calmed markets a lot since March of last year, and it has helped to keep EGB yields in total lower for longer, thereby creating favourable funding conditions for all Eurozone sovereigns. It is not possible to quantify where yields would have been or would now be without the support of the Eurosystem. But it is clear that the support from the Eurosystem lowered the absolute level for all sovereigns in the euro area. In the case of Austria, we at the debt management office are well prepared for a potential post-QE world. Our funding strategy has been for many years to have a long debt portfolio with a high allocation towards fixed rate debt. We have continued to pursue this strategy recently, lengthening the debt portfolio to 10.8 years thanks to our 50-year transaction. So Austria has one of the longest average debt maturities in Europe, which has further increased our already robust debt sustainability.
Q: And how do you feel Austria compares to other countries in this regard, for example your closest peer, Finland?
A: Each country has its own strategy and its own goals, and it depends on the overall situation for the economy in each country, on debt-to-GDP and the interest burden. If you look at Finland for comparison, given that a lot of investors compare us with Finland, it is not a new situation that Finland has a lower debt-to-GDP ratio than Austria. In fact, the difference between Austria and Finland has decreased compared to what it was after the Lehman crisis in 2008. And investors don’t only look at the level of government debt in their calculation of a sovereign’s limits. They look at the competitiveness of the economy, the medium-term growth outlook, the quality of institutions and the debt sustainability as well as the overall level of debt, so including the private sector. In all of these areas, Austria performs very well. On top of that, our current government has made it very clear that our goal is to decrease debt again after the Covid crisis. So overall, I would say that it is fair to look at debt-to-GDP, but hopefully all sovereigns will get back on track to decrease their debt-to-GDP level, because this helps make them more robust for a potential next crisis. Like Austria did in the past year. We had our peak in 2015 with debt-to-GDP of 85%. We got that down to 70% in 2019, and now we had and have room for all the government expenditures needed to help the economy during the crisis. That increases debt, that’s clear, but all other countries did the same and I think it was the right decision to support the people during the pandemic and have now, hopefully, an economy that is back on track to reach the output levels of 2019 soon.
Q: Where do you see Austria’s interest burden and the average maturity of the portfolio heading?
A: The average maturity of the federal debt portfolio stood at 10.8 years as of end-May. Our goal is to come in somewhere between 9.5 and 11 years at the end of the year. We are nearly there, and we will keep the portfolio long so as to lock in the low yields. This is also reflected in the interest burden. According to our most recent forecasts, interest payments on federal government debt in Austria will decline to €3.6 billion, compared to €4 billion last year. This would be below 1% of GDP for the first time in the history of the Republic. If you look back at the mid-90s, it was over 3.5%. And looking further ahead, up to 2024, then – depending of course on how rates evolve – we expect a continuation of this trend. It will be on a smaller scale due to the redemption of old, higher-coupon bonds, but it will decrease further. And that creates room for more meaningful expenditures in the budget rather than just paying interest.
Q: Is there a chance that you’ll end the year with an average maturity over 11 years, given you’re already so close?
Q: How do you measure the success of issuance, and by that standard, have you been satisfied recently?
A: The primary objective of the Austrian Treasury is to secure the government’s funding under the specified risk tolerance and at the lowest possible medium- to long-term costs. That’s our objective by law. Furthermore, we are tasked by the Federal Ministry of Finance to fund Austrian provincial states and other sovereigns in Austria. So in both respects, I think the team did a great job last year as well as this year, managing to triple the number of transactions and volume in 2020 compared to 2019, with the same number of employees but all working from home. And thereby adopted all measures with regard to the public debt management response to the Covid-19 crisis, before they were recommended by the OECD. And let’s not forget that we also managed to intensify the use of an existing funding tool to address the need of investors for tapping existing off-the-run and on-the-run bonds. The number of these bilateral syndicated taps of outstanding Austrian government bonds increased last year to about 50 versus just two the year before. This was nearly 25% of the RAGB funding volume in 2020 and helped to keep average auction sizes stable despite a significant increase in the RAGB issuance volume. This has helped to improve secondary market liquidity in our RAGB bonds, and there was clear feedback from investors that it was a good decision to carry on with the bilateral taps. We continued this year as well, with 24 bilateral taps in 2021 so far. In terms of demand, we are very proud that last year we saw the highest demand for RAGB bonds at auctions since 2007.
Q: Are you worried about a shift in demand away from longer-dated tenors, such that future syndications at the longer end of your curve might not be as successful?
A: No, we are not worried. But since the first two months of this year the demand in this segment has decreased as a function of the market expecting higher rates. We did our 50-year transaction and a lot of secondary-market sales of our 100-year bond with smaller clips and some private placements. Due to the fact that Austria is a smaller issuer with about 4% of total Eurozone funding, unlike France or Italy we do not need the big clips. So for Austria, a €100 million on €300 million ticket helps to fulfil our objective. It’s easier for us than for the big sovereigns.
Q: How satisfied are you in retrospect with the decision to issue a 100-year bond? Is 100 years the absolute upper limit?
A: We definitely do not regret being an early adopter on the ultra-long EGB market. We started with the 70-year tenor in 2016, with the longest fixed-maturity duration product in the EGB market, building on the success of our first 50-year bond issued in 2012. At the time, 70 years was the longest possible maturity under Austrian law. When this maturity limit for federal government issuance was increased by Austrian Parliament from 70 to 100 years in 2017, we brought our first 100-year bond, which was the longest outstanding government bond worldwide. We’ve tapped this bond several times before last year issuing a new century bond, cementing our leadership in the ultra-long segment. But each of these bonds built on the success of the previous one. It takes time to develop the investor base in this part of the curve, and being early has helped Austria a lot. The legal limit at the moment continues to be 100 years, so by law, we are not planning a further extension.
Q: Are there any investor segments not being reached that you’d like to reach? Have you seen any significant changes in the types of investors buying your debt?
A: Austria is well known for a traditionally very stable investor base. In our syndications over the past years, we have seen a slight increase in participation by central banks and other official institutions, with asset managers showing stable participation and banks decreasing slightly due to the regulatory changes they face. Regionally, our home market, the Eurozone, has become more important, while Asia and the US have been decreasing. We interpret this mainly as a function of the low-yield environment in the Eurozone. But in general, we always strive to further broaden our investor base, and with the planned introduction of the new Treasury bill programme, we will address completely new investors seeking exposure to liquid euro-denominated short-term debt from Austria.
Q: Is the decreasing participation by Asia and the US something you try to work against?
A: We think it is more an issue of the low-yield environment. But we might to intensify our investor relations efforts in these regions after the Covid pandemic.
Q: What can be expected going forward in terms of green issuance? Would you issue a green bond in 2022, at which point most EGB issuers will have already done so?
A: There is no decision yet on a sovereign green bond for Austria, but together with the Ministry of Finance, we are looking at all the eligible assets for a potential green bond. This year, things have been further complicated by the fact that potential sovereign green expenses should not include projects for which Austria has already applied to the Recovery and Resilience Facility. Otherwise, there would be double-counting with the announced green bond from the Commission. In this regard, we are waiting for final approval of Austria’s project by the European Commission. But ESG and especially climate awareness are very important for Austria, which is underscored by the fact that nearly half of Austria’s Recovery and Resilience plan, which we submitted to the Commission in April, is made up of climate-related spending. And in general, I think it is fair to say that Austria is already seen as a green issuer, which our good sustainability ratings and rankings testify to. This is taking pressure from us in terms of being among the first green bond issuers.
Q: Even in the absence of a concrete decision at this point, is it still a reasonable expectation that a green bond will be coming next year?
A: It’s too early to say.
Q: Does the competing supply from the EU under the NGEU worry you?
A: We do not see a big problem. The EU is a new, big, highly rated issuer, but on a temporary basis related to the NGEU. This is the big difference compared to a sovereign. A sovereign will keep issuing, but the NGEU is a temporary project. Also, the issuance of the EU, under both the existing SURE and the NGEU, is done on behalf of the EU sovereigns and therefore reduces their own funding needs, because the sovereigns will receive the money from the EU directly, rather than from the capital market. So most investors will therefore not see this issuance as additional supply. And also, there is a lot of demand overall for highly rated Eurobonds, leaving enough room for the new kid on the block.
Q: Is the fact that they are doing this for sovereigns not to some degree a disadvantage, especially for smaller DMOs, as it means you become less active in the market?
A: I don’t think so, because if you look at the historical average funding volume for Austria, it’s in the range of €25 to €28 billion. Last year, we did €63 billion. This year we’ll be in a range of €65 to €70 billion. The crisis needs a lot of money, and therefore we more than doubled our funding size. So it helps us that our funding size will not be as high as this year or last year. And Austria’s funding conditions are nearly at the level of the EU, so we didn’t use the SURE, because we financed instead on our own on a cheaper basis. If you look at the NGEU and the grants, it’s clear that Austria will use this. But with respect to the loans from the NGEU, the Ministry has to decide on the basis of the actual funding conditions when the time comes in the next couple of years. If the situation remains stable and we have nearly the same funding conditions as the NGEU, then we will fund on our own. This helps the investor as well for diversification reasons, that they do not have only the NGEU, but also smaller issuers and sovereigns as well.
Q: What can you share about USD- or AUD-denominated issuance?
A: As a relatively small sovereign, foreign currency issuance always depends on the relative attractiveness versus our own euro funding, which is mostly driven by the basis swap. If the basis swap is not in our favour, we will not go for a transaction. But together with our primary dealers, we continuously monitor foreign currency markets and we are ready when opportunities arise. In the short-term range, so up to one year tenor, 60% or 70% of the funding is via foreign currency and gets swapped back into euros. In the medium to long term tenors, there is no cost saving versus our euro funding at the moment, and therefore, we are not in the market. We also do not plan to build up a benchmark curve in the USD as other larger sovereigns do. Via our EMTN programme, we can issue in all currencies: dollars, sterling, Swiss franc, Japanese yen – that’s our broadest programme. The AUD programme only allows AUD, but the situation is the same: we are an opportunistic issuer, and if we have a cost saving versus our euro funding, we will enter the market. Otherwise, we fund via our euro curve.
Q: What are your thoughts on retail issuance?
A: This is not a topic for us at the moment. The ongoing low-yield environment makes it less attractive in our view for retail investors to invest in government debt instruments. On the other hand, increasing regulatory requirements like KYC-processes mean that retail funding causes more work for sovereign debt management offices. But maybe new forms of technology like blockchain will create new opportunities in this area in the future. In this respect, it is worth mentioning that in October 2018, Austria was the first country worldwide to use blockchain technology for its government bond auction system.
Q: Regarding near-term issuance, there were expectations of an Austrian deal around the end of June (possibly 15y or 100y) – are these expectations on the right track?
A: There is no decision yet in terms of timing or maturities of upcoming syndications. So depending on how funding needs develop, we will decide if there will be one or two syndications. We expect the new economic forecasts of the Austrian Institute of Economic Research at the end of June, and this will be relevant. As this is the basis for the budgetary forecasts, we can then better decide if we will go for a transaction before the summer or not.
Q: And if so, is one or the other maturity preferred?
A: There are many options. If you look at our curve and the maturity profile, there are a lot of gaps that can be filled. One is the 15-year tenor as well, but also in the 7-year there is a gap. So there are a lot of possibilities. But it’s too early to say for which maturity we might go in a third syndicate transaction.
Q: Is the possibility that the ECB will soon start talking about tapering a motivation to issue longer maturities as much as possible?
A: It’s not only the discussion about tapering. We have the goal I mentioned with respect to average maturity, and we are aiming for the upper end of that range. Therefore, it’s more a matter of the steepness of the curve and of the demand in the ultra-long segment. But we have our new 50-year benchmark, we have our own quotas eg from syndications, which we sell on the secondary market via our primary dealers. We use the possibilities on the market to further lengthen our profile: the 30-year from last year, the 20-year from last year, the 50-year from this year and the existing 100-year all help us to further lengthen our maturity profile.
Q: Another deal is expected for September/October; what can be said about this possibility?
A: For this, too, we have to closely monitor the budgetary forecast. In 2019, Austria had a budget surplus. Our funding needs were €27 billion in total. This year, we have €65 to €70 billion and around €90 billion in short-term funding turnover. The budgetary expenditures in normal times are about €65 billion. Last year and this year we had €110 billion expenditures. Therefore, the volatility in the budgetary forecast is dramatically higher than in normal times. We are in weekly discussions with the Ministry of Finance to get a better picture of the funding needs. But it is clearly too early to say something about September.
Q: Among EGB issuers, Austria has completed only a bit more than 40% of the funding programme. Is there any specific reason behind this strategy?
A: As of mid-June, we completed over 45% of our projected overall 2021 funding, and in terms of RAGBs, we have completed around 55% so far. This is in line with our strategy not to lock in too much funding too early, in case the economic and fiscal situation improves further. This is a quite typical picture, as most of the short-term funding is conducted in the second half of the year. But due to the fact that the budget is calculated on the basis of a low GDP forecast, further improvement in the economic and fiscal environment would mean a reduction in our funding needs, so we don’t want to lock in the funding too early.
Q: On your EMTN programme, what are the plans?
A: There is no specific amount planned for the EMTN issuance. It depends on the basis swap and the relative attractiveness versus our curve. So I would say it complements our long-term funding by offering tailor-made instruments for investors, and therefore there are no clear plans.
Q: So you don’t target a specific amount to be issued in Private Placements and Issuance of own quota?
A: No. It’s part of the overall funding, but there is no specific target.
Q: What did you think of the ECB’s decision on June 10?
A: Over the past weeks the market changed the view that tapering would be announced on June 10 to the view that this might happen in September. But there are now views that even September is too early. So the absolute yield level has stabilised a bit due to this new perspective. There are good funding conditions for all the sovereigns that will come to the market. We already saw the first €20 billion 10-year transaction from the EU with a stable interest level and less volatility, and this is very supportive for all the sovereigns. So at the moment, funding conditions seem stable.