Exclusive: Transcript: Interview with Belgian Debt Agency Head Maric Post

3 May 2024

By Aurėja Bobelytė – VILNIUS (Econostream) – Following is the full transcript of the interview conducted by Econostream on 25 April 2024 with Maric Post, Director Treasury and Capital Markets at the Belgian Debt Agency:  

Q: Mr Post, what impact on you, if any, will the ECB’s reduction and subsequent termination of PEPP reinvestments have?

A: In the global market picture, there's probably an impact when considering the repricing of bonds versus swaps, for example. There has clearly been a change in market pricing. For us, relative to other European government bonds, the impact is fairly limited, because the whole programme and how the ECB now steps out of the reinvestments is well flagged. It’s not something unknown, or something that will surprise the market in any way. In that respect, I think it's not an element that will lead to sudden price changes or anything of that sort.

Q: What are the potential implications for you of interest rate cuts starting soon in the Eurozone?

A: We thought the market had overly anticipated rate cuts at the end of last year. Consequently, we reacted to that by frontloading a little bit on our issuance this year, because we felt that expectations were somewhat overdone. We have seen quite a correction in the meanwhile. For us, the anticipation of rate cuts meant that we saw very strong demand in the transactions that we did this year, with record order books in all of them. We had a total of €180 billion in orders for three syndicated transactions. So, it's been a very strong market backdrop, and allowed us to come to the market with our transactions in an environment that was very supportive.

Q: How do you view the results of the latest 5-year OLO syndication?

A: That transaction was also very strong. We felt that there was an opportunity to come to the market in a fairly quiet period, when it was still the end of the of the Easter holiday period. And we were looking towards the month of May, which is probably a little bit more difficult, given all the holidays. So, it would be harder to find a good window for execution later on. We're very happy to have taken advantage of that window to launch the 5-year OLO. We had very strong books. Fairly similar to the 10-year books, I would say, with a lot of interest from, on the one hand, the non-euro central bank community. And on the other hand, bank treasuries were very present both in the 10-year transaction and in the 5-year transaction. The timing was good for us, with a stable background, making it suitable for a transaction in a maturity we hadn't been active in for a long time. It's been more than 10 years since we issued the 5-year OLO, so that was a bit of a “back to the future” experience for us.

Q: Are you planning to continue the 5-year OLO syndications later on, or is it too early to ask?

A: We tap our bonds by listening closely to the market and to our primary dealers. It will depend on the demand. But clearly, it's also a possibility to access a part of the yield curve where we hadn't been very active, which is obviously an interesting point of the curve, if you look at our maturity schedule and at the cost of issuance in those maturities. If demand is there, we will certainly continue to tap that bond as well in the coming year.

Q: How would you assess the launch of the 30-year USD benchmark transaction?

A: That was quite special because it's an unusual maturity for a foreign issuer in dollars. We had done one private placement in dollars in a very long maturity, but it's not typically the sort of maturity that most of the dealers tend to follow closely. One of our primary dealers, Morgan Stanley, did a very good job in monitoring that part of the curve and saw an opportunity and worked very hard on it because they had already been signalling some interest to us since February, so they worked on it for two months. We achieved a very strong deal, allowing us to lock in a rate with an arbitrage to the OLO curve and reach a number of investors in dollars, which hadn’t happened in a while, considering that the OLO curve had been so rich for many years. For the past years it was very hard to find any alternative that was cheaper for us than OLOs. So, we’re very happy to have been able to do that this month.

Q: Are you satisfied with the share of foreign demand for Belgian bonds?

A: Yes, in general, if we look at the composition of who's holding the Belgian bonds, it's been fairly stable over the past ten to twelve years. Actually, the part of foreign holders’ property increased in the most recent period, because of the lesser presence of the private Belgian customers, but that seems to have stabilised most recently. In the past two years, we've seen Belgian investors coming back and being important buyers of our government bonds, and this year too, we see the same trend continue. It looks as though that is stabilising. But obviously the holdings of the other big Belgian investor, the National Bank of Belgium, will shrink. So, it remains to be seen whether the Belgian private investor will take the place of the National Bank when it's reducing its balance sheet. Otherwise, turnover in the OLO market has been growing very strongly over the past couple years, we've seen massive interest from all parts of the world. From that perspective, it's good that we have the alternative of placing outside of Belgium and in Belgium itself as well.

Q: Can you say anything further about your 2024 syndication plans?

A: I can be very brief: there will be no more syndications. We were very well-funded, and we have done the three syndicated transactions that we had announced at the end of last year, so we will now continue to issue through the auctions and that will be the way of our financing for the remainder of the year. But obviously we are extremely well-advanced, with already close to 60% of total long-term issuance done, meaning that the rhythm of the funding will be a little bit lower through the auctions in the next months.

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

A: We still have the possibility to issue our two green OLOs, and again, it's a question of demand and we will react to the demand as needed. If we see that there is a strong interest in either of the green bonds, we’re happy to issue them. We have quite a large portfolio of eligible green expenditures this year, which means that the amount that we could potentially issue is high, up to €4 billion or €4.5 billion. However, it depends on demand. If we do not get the feedback that these bonds are being looked after by the market, then we are not pushing them. But if we see that the demand is high, then we can put it in an auction or also in an ORI auction as we call it, which is a smaller auction. I would say last year it was a little bit less because we didn't get that much feedback on strong demand. We'll see how it goes this year when we are in the middle of our auctions.

Q: Do you expect the demand for green bonds to be higher this year?

A: I’m not so sure, last year we were a little bit surprised to see demand lower than in previous years. We talked about that to our dealers, trying to understand whether it was a question of the demand not being there. Some pointed to the fact that there was a lot of supply of green bonds. There is, of course, a lot of issuance from the EU and other countries that have green bond programmes. So maybe it's just a question of supply, meaning that there's a little bit less space for the green OLO. There's also the maturities of the bonds. The oldest one is now just in the 10-year range, which can make it more popular. The other one is a 15-year. To be honest, last year the demand for 15 to 20-years was just not very strong in general. So that could also have been a driver of somewhat lesser demand. But it was also a little bit wider in the sense that a couple years ago the topic of green bonds would be one of the main topics of discussion with any investor. We also felt that falling back a bit last year, so there were less questions about the green bond program. It's very hard to try to get a feel of how strong demand would be for green bonds but we are always listening to the input that we receive from the market, and we will certainly be there to tap it if the demand allows us.

Q: Retail investors have also been a huge influence for several European issuers including Belgium, particularly with the €23bn 1-year bill. Would you mind explaining what funding targets you have for retail and how this might be achieved, and how the maturity of the monster 1-year bill might impact wholesale or retail funding, particularly timing, and how you cope with it?

A: I guess the Belgian retail programme is a little bit atypical. It is a programme that has existed for a very long time. There is issuance every three months. In the past, we normally issued longer maturities, so 3 years, 5 years, 8 years, 10 years. What was new last year was indeed the possibility of this 1-year maturity, which is of course interesting to a lot of retail investors, which was particularly interesting with the shape of the yield curve, meaning that that we could offer quite an interesting return. On top of that, it was made even more attractive by a decision by the Minister of Finance to give a tax advantage. The normal tax treatment of these state notes is a 30% withholding tax. And for this one, last year, there was an exception granted of only 15% withholding tax. The combination of interesting yield and lower withholding tax led to an incredibly successful deal of €22 billion. Now, can we have the same sort of success this year? That was of course the big question when we had to establish the funding plan for 2024. The government had foreseen the possibility of applying a 15% withholding tax once again in the first half of 2024. Because of that, we established the funding plan supposing that the government would indeed apply the 15% withholding tax. We therefore established a funding plan with still a quite high volume of new issuance of the 1-year state note. We supposed that the issuance would still be €13.5 billion of the 1-year state note in 2024, meaning a reduction of the outstanding amount by the end of the year, but still, of course, implying significant issuance there. Furthermore, we also supposed that the major maturity that we will have in September would also give us the opportunity to offer the 1-year state note, but then without the tax advantage, because that would only be possibly applied to the first half of the year and the possibility to see reinvestments in other maturities, maybe in the 3-year maturity or the 5-year maturity also upon the maturity of the state note.

Now, what has happened in 2024 is that the government in the end decided not to apply the 15% withholding tax. So that left us in a new situation, because without that advantage, we knew that the Belgian retail investor would still have some interest, but not at all to the tune of the billions that we saw in 2023. When we issued the state note in March, it was with the 30% withholding tax. Interest was there, it was certainly a good amount for what we traditionally see in in the state notes with a €400 million subscription. But nowhere near the billions that we saw in 2023, or indeed, that we would have expected in 2024, should there have been a tax advantage to this insurance as well. What does it mean in practice? Not all that much. Last year, we had to adapt our funding plan quite dramatically on the short end by barring the issuance of two lines of T-bills. And this year, if we would need to increase the T-bill issuance again, because there will be less issuance in the state note, then we will do so. But importantly, we will always keep it in the same maturity range of the alternative product. We will not change the long-term funding plan because of changes to the short-term state note programme. This is the same logic that we applied in 2023 when we diminished the issuance of T-bills. This year if it will not be possible to issue a big amount in the retail product because of the tax treatment that in the end is not what we expected it to be, then so be it, we will increase the issuance of T-bills again. We foresee no difficulties at all with that, especially given the fact that we are already very well-funded, given the big success of the of the syndications that we've done so far and the high speed at which we have been funding ourselves. The big 1-year state note maturity in September still remains an opportunity for us to attract the retail public to reinvest either in 1-year state notes or in longer maturities. And let's hope that the market conditions are such that they can indeed be interested to reinvest part of that big maturity in September, but the remainder of the funding of that maturity will easily be done with our other short-term instruments. Just by increasing T-bill issuance, also by using the cash buffer that we hold to start off, that shouldn't be an issue at all for us.

Q: In terms of syndications, we understand that borrowers are increasingly giving preferential treatment to investors who submit their orders early during syndicated transactions. Is this something that Belgium would do? Do you see a problem of overinflated orders?

A: It is something that we can do, of course, to give some preferential treatment, but we don't have a formal system of preferential treatment like the early bird notion that, for example, Spain applies to its syndications. We can give some preferential treatment to orders that are important for the building of the book and have an important signalling function. Those are things that can be done and that we have done in the past. But we do not plan to formalise it, we don’t really like to put ourselves in a position where we pre-commit ourselves to apply any form of rules. So, there we will keep the flexibility that we want. In terms of the inflation of the orders, that is a phenomenon that has been going on for many years. It is annoying in the sense that it can lead to a situation where the size of the order book is not very telling anymore. It is something that we discussed with investors. To be honest, we didn’t get much feedback from the investor community indicating that they saw it as an issue. And therefore, we accept it as it is, even though it is not adding to the transparency of order books, if no one really knows from the outside what is in your order book and how much of it is high quality and how much of it is just very inflated orders. It is one of those things that would be better if it would be different, if the size of the order book would be more telling during the process of book building of what is going on and of the orders that can really be filled in an order book. But I guess in the meanwhile it's become one of the things that investors and people in the market alike have come to accept and live with. It's not particularly a problem, but it is a little bit strange.

Q: As QT continues, and the dollar strengthens, the bid from central banks and FX reserve managers is low compared to previous years. Which investors are stepping up?

A:  We haven’t seen this. For us certainly, if you look at our 10-year deal and our 5-year deal, it was quite striking that we saw quite a lot of interest from central banks. The other group that has really been much more present again is bank treasuries clearly attracted by the very interesting asset swap levels that can currently be seen in the market. They are the other category of investors that have increased their share of transactions when the ECB has been stepping back compared to a couple years ago.

Q: What would you consider to be the main challenges to Belgian public finances? Are there any plans in place to tackle these challenges?

A: Over the past couple of years Belgium has stood out by very good economic performance compared to the rest of Europe. So that has certainly been very positive. At the same time, we've been confronted by bigger deficits than other European countries. There is the realisation by most institutions, such as the National Bank of Belgium, that this is a situation that that cannot last and that will need to be corrected at some stage by the next government. As for what we see in the market, we can only say that activity in our debt instruments has been very strong, it has been growing quite significantly over the past couple years and we also get a lot of good feedback on the liquidity of the instruments. I would say that everything that that can be done on the side of the of the debt agency to prepare for good issuance at good conditions in a liquid market has been done. Indeed, the correction that needs to be done is probably on the fiscal side in the coming years. I think there's a strong awareness of that in general in the Belgian political world as well.