Exclusive: Transcript of Interview With Austrian Treasury Managing Director Markus Stix on 3 May 2023

11 May 2023

By Xavier D’Arcy – FRANKFURT (Econostream) – Following is the full transcript of the interview conducted by Econostream on 3 May with Markus Stix, Managing Director in charge of markets at the Austrian Treasury:

Q: I was wondering if you could perhaps start by looking back at your syndication on 18 April and assess the outcome; were you happy with how things went?

A: In mid-April, we successfully priced a dual transaction worth €5bn. This transaction consisted of a new green bond benchmark with a size of €3bn and a tenor of six years, as well as a new €2bn 30-year benchmark. Although the transaction was 2.1 times oversubscribed, which is lower than in past years, the quality of the order book was high with a lot of real money investors, but fewer fast money accounts. We believe that this is due to the ongoing market normalisation as compared to pre-2015 before there were QE programs from the ECB. During QE, we observed on average five times covered books as a normal situation, but now it is more important to focus on the quality of the order book.

Q: Was there a particular rationale for going for the six-year bond in the green segment?

A: Yes. After establishing our green holistic framework in 2022, Austria's strategic goal was to give investors a clear strategy. Clear numbers are important from this perspective, and we announced €5.5bn green funding this year after issuing €5.1bn last year. We communicated this to the market one week before the transaction of the six-year bond. Afterwards, we spoke to several ESG investors and our primary dealers about the various options. The best solution for this holistic approach was to have this new point between the very short-term and our inaugural 2049 bond from last year.

After issuing the inaugural green bond last May, Austria was the first sovereign worldwide to issue a green treasury bill last October, and then we started with green commercial paper in March 2023. For us, it was the logical next step to enable green investors to fill the gaps between the short-term and the longer tenors. If we look at the Eurozone sovereign issuance transactions, there is no outstanding green bond in the 2029 maturity range. We are proud that 40% of investors, who invested in our inaugural green bond last year, also invested in the 6y, and we had 60% new green investors. This was all part of our plan to attract additional green investors with this transaction and broaden our investor base further.

Q: What has been the response to the green commercial paper programme and where has the strongest demand come from?

A: The green commercial paper programme has seen strong demand, particularly from green money market funds, central banks, and corporate treasuries. The issuance is done on a bilateral and tailor-made basis in all currencies and tenors up to 12 months. This enables liquidity management for investors and attracts boutique investors as we have reduced the minimum size to 10 million or equivalent, compared to the conventional CP program's 50 million minimum size.

Q: Could you give an indication of where you've seen most demand, which maturities and which currencies?

A: Currency-wise at the moment, we have a split the 50/50 roughly between US dollars and euros. Tenor-wise currently, one to maximum three months.

Q: Regarding your syndication plans for the rest of this year, you promised a potential three or four syndications and now you have done two. Do you think you will be finished soon? At the end of May last year, you had already done three syndications. Can we expect at the end of May this year that you also will have completed three syndications?

A: Our syndication plans depend on the net deficit of the Republic of Austria and its funding needs. It's not based on redemptions as they are forecastable. Currently it's too early to see the progress in the budget execution. We are monitoring together with the Ministry of Finance and will decide our next steps accordingly. We have announced a total of €5.5bn from the green pillar, with more than €4bn in medium- to long-term green instruments. We have already done €3bn in the six-year tenor, so at least €1bn is left and we plan to tap the 2049 green bond by €1bn via auction or syndication.

Q: You said it will depend on the development of the funding needs. Do you think potentially the milder winter that we have seen, the energy crisis not being as bad as people have predicted, could have an impact on those funding needs?

A: As I mentioned before, it’s still too early to judge on this, we are at the beginning of May now. A lot can happen throughout the remainder of the year.

Q: Your green funding plan includes a target that 20% of green financing should be funded by short-term instruments. It's interesting to note the contrast with some of your peers who tend to focus on everything beyond the 10-year segment. Why do you think they haven't gone down this path as much as you have, and do you think your experience will make it more attractive for them?

A: Yes, if you look at our 80/20 split, we announced for 2023 that we would aim for around 80% in medium- and long-term green financing, and around 20% in short-term financing, including T-bills, commercial papers, and green deposits. When we have developed our holistic framework we were well aware that many sovereigns issue in the 20-year plus area. This strategy is generally based on the fact that green projects and expenditures have longer durations. However, with our framework we have made the missing link between short-term financing and generally long-term expenditures. This is achieved with the rolling extension of the short financing instrument to the same maturity as the underlying bond, starting from last year. I think this is the missing link that investors have been looking for, as they now have the possibility to invest and reinvest on a rolling basis.

We have had some meetings with our DMO colleagues in Europe, and they are interested in our approach. However, changing a green framework is not an easy thing, so many colleagues may wait for the final EU green bond standard before updating their framework. Maybe then they will also include a short-term possibility in their framework.

Q: The 80/20 split you mentioned, how hard or soft is that target? Are you on track to meet it this year?

A: It's not a hard limit. We plan to raise €5.5bn in green format this year, of which €4.25bn will be in the medium to long-term and €1.25bn in the short-term, which translates to a split of 77% versus 23%. This target is more of a guidance for investors to split up their investment portfolio within Austria's green framework.

Q: In 2018, you were the first European sovereign to use Blockchain technology in government bond auctions, albeit in a limited role. In the five years since, digital bond issuance has gained momentum. With Austria being famous for its innovations in the sovereign debt issuance and management space, do you have any plans to delve further into digital bonds? How would you rate the potential of this technology and its viability in the market currently?

A: We don't have any concrete plans yet, but we see potential in exploring blockchain technology further. As you mentioned, we've had a positive experience with using blockchain in our auction system. In 2021, we participated in a national research project called Delphi, which involved our central bank, the central securities depository OeKB CSD, and two large private banks, Erste Group and RBI. The goal was to analyse the issuance and settlement of Austrian government securities as security tokens on a blockchain platform. One of the main findings was that there is currently no secure legal foundation for issuing bonds as tokens outside of the common depository platform in Austria. So, the biggest requirement would be new legislation, which is currently not being discussed. While we clearly see potential for this technology, we don't have a specific timeline for entering the digital market in this format.

Q: Do you feel vindicated by your strategy of visiting the ultra-long end of the curve a couple of years ago? How do you look back on it now, with everything that's happened since?

A: We look back at it with pride. It is easier from a small issuer perspective to go with tailor-made, unique strategies. Austria represents only 4% of Eurozone funding, so it's easier for us to adapt to changing market situations. Beginning with the 70-year bond, which was the first ultra-long EGB bond in the market with the highest duration at that point in 2016, we have made a series of adaptations. In 2017, we adapted our national law to extend the maximum maturity to 100 years after receiving approval from the Austrian parliament. The next step was to introduce the inaugural century bond to the market and we followed up with some taps and syndicate transactions. In 2020, we issued the second century bond and cemented our leadership in the ultra-long segment.

From an Austrian taxpayer's perspective, we are proud and happy to have issued all these transactions, for example with a coupon of 0.85%, locked in for 100 years, which is not a bad result. At present, the demand for ultra-long-term bonds has cooled down in the market, so it's not an opportune time for issuing new bonds. We recognised from the outset that it was an opportunistic issuance and that it isn't a point in the curve where you can issue on a constant basis.

Q: Where do you see the average maturity of your portfolio heading now? Do you have a particular goal in mind going forward for the average maturity?

A: Currently, as of the end of March, our average maturity is 11.3 years. Our goal for the end of this year is to be within the range of 10.25 to 11.75 years, which is the same range as last year. However, we have changed our new issuance strategy. In the past few years, the average maturity of new issuance was above 10 years. Last year, we decreased it to 8.6 years and we will continue decreasing the maturity of our new issuance for the maturity of the portfolio to be within the aforementioned range.

This change in strategy is to adapt to the increase in nominal levels from the interest environment. Furthermore, due to the fact that we increased our maturity in the past, last year our interest costs in relation to GDP reached a low-point at 0.7%. For comparison, in the mid-90s, we had over 3.5% interest costs versus GDP. Based on our recent forecast, this year, we will end up at around 0.95% to 1% and for the next few years, it will be in the range of 1.2% to 1.3%, clearly below the mid-90s levels.

Q: I wanted to ask you about spreads as well because compared to just over a year ago, there's been quite a widening compared to some of your peers. What factors do you think best explain this? Is it purely proximity to Ukraine war and exposure to the geopolitical consequences? What other factors are you seeing as responsible for some of that widening?

A: I always encourage investors to buy Austrian government bonds now as we're trading 65bp above Germany which is the best buying situation for investors. However, on a more serious note, starting from 2022, market volatility has led to a significant reduction in liquidity. This is the main driver of the increasing spread, which is not unique to Austria. Smaller markets like Austria suffer the most when there's a flight to liquidity. Another concern for some investors was our dependency on gas imports from Russia. However, Austria has taken several measures to reduce this dependency, and this has also been recognised by credit rating agencies in their recent updates. To support liquidity, we sell our own redemptions on the secondary market, tap our existing bonds with bilateral taps, and provide more incentives to primary dealers for higher turnover.

Q: Could you give us an assessment of how ECB QT has impacted you and what impact you’ve seen in the market? Could you cast an eye forward to what we're looking at now, which is an eventual complete roll down of reinvestments and how you see that having an impact?

A: In general, we are returning to a normal market situation. Although the big elephant, the ECB, is partially stepping out of the room, we have conducted several investor relations activities to attract new investors such as bank treasuries, pension funds, insurance companies, and corporate treasuries. The higher nominal interest environment and not too expensive pricing versus swaps are helping the bank treasuries. We are optimistic about the market's ability to handle this change, and we have only been in this QT transmission period for one and a half months. We will continue to monitor the situation closely.

Q: On the subject of the elephant in the room, i.e. the ECB, this week has seen the reintroduction of the ceiling on the remuneration of government deposits at Eurozone central banks. Have you seen any impact from that?

A: There are no significant implications for us in terms of remuneration. This is because we have been experiencing lower remuneration for our deposits at the Austrian central bank already since last October, in contrast to many other euro area sovereigns. This was due to the ceiling wording from the ECB which allowed each national central bank to treat public entities differently. As a result, we have already taken steps to reduce our cash holdings at the central bank significantly and have extended our money market operations by engaging in commercial paper, deposits, and reverse repo transactions.

Q: I also wanted to ask a question about private placements. How do you approach these when you receive a request from a dealer? What factors play a role? Is it purely a question of cost for you?

A: The goal of bilateral taps is not just to minimise costs, but more to create liquid points on our curve. To achieve this, we tap existing bonds via syndications, auctions, and bilateral taps, which help us to increase the size of our benchmark. For tenors between 5 to 15 years, we aim to have between €10bn to €15bn outstanding. However, if we go longer in the curve, the maximum size will decrease. We have not observed any direct impact of QT on bilateral tap issues, but we will monitor the market, and we may see some effects later in the year. At present, the bilateral taps are primarily driven by liquidity concerns and our desire to spread out volume across our benchmark.

Q: Finally, I wanted to ask about your thoughts on retail issuance. Does Austria have any plans for that?

A: If we look at our government bonds, it is easily possible for retail individuals to invest because the minimum denomination is only €1,000. And if we look at the asset managers, they invest in our bonds. And retail investors then buy these mutual funds. So, you can argue that retail investors are part of our bond universe already. But we do not have any plans to have a dedicated ringfenced retail product in Austria.