Exclusive: Transcript: Interview with Austrian Treasury Managing Director Stix on 19 September 2024

26 September 2024

By Marta Vilar – VIENNA (Econostream) – Following is the full transcript of the interview conducted by Econostream on September 19 with Markus Stix, Managing Director in charge of markets at the Austrian Treasury.

Q: The ECB has already started cutting interest rates this year. The market believes that there will be another cut in December, less so in October. Is this affecting your issuance plans?

A: No, because it was already incorporated into last year's projections, so it was expected.

Q: How much do you expect the average cost of Austrian debt to decrease because of these interest rate cuts?

A: If you look at the year-to-date figures and the forecast for year end, we will end up with an average cost of annual funding at roughly 3%, compared to 3.3% last year. But for the total portfolio, we will see a slight increase, from 1.8% to roughly 2%, due to the fact that the redemptions from our old bonds, which had for example a coupon of 0.0% and 1.65%, have to be refinanced now at roughly 3%. This will push total costs a bit higher, but nothing dramatic. But the interest costs have to be seen in the context of the strength of an economy, so in terms of GDP. We will end up at about 1.05% interest costs in percent of GDP this year, compared to the 90s, when Austria had 3.5% as an average interest cost versus GDP. So, we are in a good situation, thanks to our conservative debt management strategy, with an average term to maturity of 11 years.

Q: You dropped a plan to sell the 2086 bond a few weeks ago. One would think that right now, with interest rates going down, investors might be willing to extend duration, but that's not the case, at least for now. What's your assessment of this waning demand?

A: Yes, Austria is the only sovereign issuer in this ultra-long segment. We never announced that we would issue or tap this bond. We only announced that we would do market sounding via our lead managers in the investor community. Austria is an issuer with clear principles. We do not enter the market if we think that the pricing conditions for tapping such an ultra-long bond are not suitable. So, the expectations from investors and our expectations didn't meet at this point, neither pricing-wise nor size-wise. Normally, if we tap such an ultra-long bond via a syndicate transaction, we would go for €1 billion as a tap size. At the end, there was not enough demand for the tap of this bond in the syndicate format.

The plan was originally based on the huge reverse inquiries at the end of Q2 and the beginning of Q3. Then we had the summer months and holidays, and that’s why we didn't announce immediately that we would go for this transaction. Instead, we did some sounding via our syndicate banks to see if there was enough demand. Volatility has been increasing and decreasing, so it's a very tricky situation with this ultra-long segment. But at the end, one week after we stopped this transaction, we tapped this bond with more than €700 million via the auction system.

In this situation you see how important it is that you have more issuing techniques, not only the syndicate format, not only the auction format, not only bilateral taps. It’s a really comfortable situation if you have three different issuing techniques, you can choose the most appropriate technique for the market situation, and the auction system was really perfect in this case.

We were able to go for more than €700 million (€741 million) with more than two times bid-to-cover ratio in this transaction. And there you see that it is very important that you have powerful primary dealers. They do the warehousing, that's one of their primary functions, and sell later to the market in smaller clips – compared to a syndicate transaction, where you're facing investors directly.

Q: You mentioned different techniques, so now you're planning to issue this long-dated bond with another technique. Or what is your plan now?

A: We have all three options on the table, syndicate format, tapping via auction, or tapping bilaterally based on reverse inquiries from investors. And we will continue doing all three options, because why should we skip one? If there is demand, we will go for syndicate format. If we have a smaller size, but not too small, we would go for the auction technique. And if we have smaller demand (e.g. €200million), then we would go for the bilateral tap.

Q: So, do you have any plans in terms of when you're going to issue this bond?

A: This ultra-long segment is a very different segment for issuing. It's not possible to integrate this in your auction calendar. You have different investors. You have the outright investors. Some of them have a critical level of 3%. Now we are below the 3%-threshold criteria for some investors. You have duration buyers, who need smaller volumes in this ultra-long segment to adapt duration in the portfolio. You have convexity buyers, and you have zero-coupon buyers. Some of the bonds have currently very low prices, for example 45, so it's traded like a zero-coupon bond. You invest only 45% and you receive 100% later. It helps you to invest lower cash amounts now, and you will earn a lot later on, and you have smaller revenues cash-wise in the future. It's a completely different investor category, and it depends on what is the need of some of the investors. Therefore, it's more driven by a reverse inquiry.

Q: So, at some point you think that demand for ultra-long bonds will actually come back?

A: Definitely. To give you some numbers, this year we issued already €3.1 billion in our ultra-long segment by auctions and bilateral taps. We did the 2071 bond in May via auction, we did the 2086 in September via auction plus bilateral taps during the year, and we tapped our 2120 bilaterally three times with a total amount of €550 million. If you compare this figure with last year's issue in this area of only €400 million, there was clearly more demand in the ultra-long segment compared to last year.

Q: So, once you see demand is recovering, you will tap again this part of the curve?

A: It's an opportunistic issuing point of the curve. The difference to our 30-year point of the curve is that we have an inverse yield curve down to the 2120 of roughly 80bp. You can argue that the ultra-long curve is like the second curve of Austria.

Q: You sold privately three tranches of your century bond in February, April and June for a total of €550 million. Are you expecting to tap the market again in this last part of the year?

A: If the market is in our favour and we see demand, it is possible, yes. But it's more opportunistic and not driven by a clear issuing plan that we can go and say, ‘Yes, we will go on the next auction date with the 2120.’ It’s not possible to have this in the issuing calendar already decided in advance.

Q: At the end of August, we estimated that this year's borrowing requirement was around 72% funded for Austria. While a little ahead of the pro rata pace, it's true that it puts Austria towards the back of the pack in terms of Eurozone sovereign issuers on this measure. Are you comfortable with this? Is this something that you watch?

A: We are comfortable because the figure is now already over 85%. This includes the last and third syndicate transaction of the year and the September auction. So, we are really well on track with over 85% by mid-September. And we have, auction calendar-wise, three auctions left in October, November and December. So this gives us confidence that we will run our funding with the expected figures.

Q: Over the past year, RAGB yields have fallen around 80-100bp as the Eurozone economy has slowed down and the ECB has finally begun cutting rates. The Austrian yield curve between the 2-year and the 10-year bond has swung between a negative and a positive slope over this period. To what extent are your issuance decisions influenced by such moves in the spread, both in short- and longer-term funding?

A: We are closely monitoring market developments, that's for sure. As I mentioned already, after spreading out auction dates over the whole year, bond-wise and bill-wise, we have a very good average effect of funding volume, which is spread out over the year. In addition, we have the syndicate volume, where we set milestones during the year to bring new lines. For example, normally early in the year, a 10-year on-the-run bond is in the interest of investors. But for us as well to have a new reference point. And with these gross-borrowing volumes, where we are this year at around €75 billion - you need at least three syndicate transactions, which are spread out as well over the year. With the bilateral taps you can interact with the market on a daily basis. From this perspective, it is very good to have these three issuing techniques in parallel to be in the market on the one hand on a regular basis, but to be punctual in issuing new bonds and clearly in line with the demand of investors with the bilateral issuing technique. We are really happy with this situation. This will reflect in the issuing conditions. Because I think it is not possible to enter all volumes at the lowest point as we need sufficient investor demand.

Q: The finance ministry announced last year that in the second quarter of this year you would introduce a new and safe retail investor offering. How is this going?

A: Bundesschatz is the safest Austrian savings product. We launched the product on April 22, so nearly five months ago. We observed a very positive market reaction and the product developed very well. The development is still extraordinary. The system setup is a completely new system with a unique approach where we use the digital Authentication service ID Austria as the entry point, and from the KQYC process it is really easy, because the financial market authority approved ID Austria as a valid form of authentication. It's not necessary anymore to bring your passport and give all your data. It is stored centrally within the federal authority already, and we can use this service.

Bundesschatz is the first finance application which uses this and it's open to use for the banks in Austria as well. To our knowledge, they will continue and will implement such service form of authentication as well. It’s really easy. You can open an account within 60 seconds. We have a conventional Bundesschatz and Green Bundesschatz offering. We have conventional instruments with maturities of one month, 12 months and 10 years, and in the green format with six months and four years. This Green Bundesschatz is the first green retail money market product in the world, and it's therefore easy for all Austrian citizens to participate and invest in the green transformation of Austria. And we are more than happy with the uptake. If you look at the split between conventional and green, roughly 25% of our volume is in the green format. It’s a really huge success story. We are really proud of it.

Q: You were also planning to increase the portfolio of short-term funding instruments by €2 to €4 billion. Do you expect to rely on these short-term instruments a bit more for the remainder of 2024 after the 2086 bond reopening fell through?

A: No, because we added the 2086 bond via auction, and there’s only €250 million left from the initially targeted size of €1 billion, we issued €741 million. And there is no change in the strategy. So, we will increase our short-term funding by €2 to €4 billion, as announced last year. We are well on track with the short-term issuance as well. Normally, from a sovereign perspective, the short-term issuance will take place in the fourth quarter of the year. Therefore, we are profiting from lower costs in the short-term issuance after two cuts from the ECB, and that's an advantage compared to the beginning of the year.

Q: In terms of the profile of Austrian debt holders, are you happy with the current profile? Are you planning on increasing the presence of domestic investors?

A: Domestic investors are very well appreciated. Therefore, one of our initiatives is this new product, the Bundesschatz. If you look at the biggest buyer of sovereign bond in the Eurozone, the national central banks, they are stepping completely out of the room. They are counting as a national investor, and we have to replace the Austrian National Bank with new investors. We would be happy to increase the domestic share. As I mentioned, Bundesschatz is one important product in this aspect. It's without any costs and charges for the retail investor community. Additionally, we introduced in March this year a new market maker model for all Austrian government bonds on the Vienna Stock Exchange, where it is easy for retail investors to buy all our bonds.

Q: The Bundesschatz program has had very successful first five months. How do you see this facility developing? Do you envisage it becoming a growing contributor to overall funding?

A: As already stated it is very successful. We have already more than 64,000 accounts, and we have sold €2 billion to the private investor community. But if you look at our overall gross borrowing of around €75 billion, it's only in the single-digit percentage points contributing to the gross borrowing. It is clear for us that our main financing instruments are RAGB bonds, treasury bills and commercial paper, placed at institutional investors. But it helps a lot that you see the support as well from the Austrian society and the Austrian private investor community, that you see more awareness from public citizens and what the Austrian government is doing to foster the green transformation. So, it is not the demand side on the green community that is capping the volumes, it's the supply side. That's the huge difference. And from this perspective, we are really happy with the development.

Q: You are now the first sovereign issuers to issue green money market products for retail investors. How's the development in this segment?

A: As I mentioned, 25% out of the whole Bundesschatz volume is invested in the six-month and in the four-year tenors for the Green Bundesschatz. Additional investors are coming in and are supporting the Republic of Austria as a sovereign issuer.

Q: Do you think that, overall, you will be able to keep up with demand once rates go back to what's considered a neutral rate of around 2.5%?

A: We think it is not a big issue if you look from the overall perspective. Why not? If you look for example at the green T bill auction in October 2022, the issuing yield was 1.25% p.a. and we have observed a huge over-subscription in this product, because you also have a lot of new investors in this segment. Look at central banks for example. They are setting up dedicated green portfolios, for example, they have to invest 10-15% out of their foreign reserves in sustainable products. Central banks are well known for being very short-term oriented investors. That's a perfect product for them, and it's not driven so much by nominal interest levels. You also have corporate treasuries, which are greening their liquidity positions and portfolios. They are for example running huge liquidity buffers to invest in takeovers of other companies, but they are not ready now. And they want to invest in short-term green products. That's the reason why we are really happy with this green short-term pillar in T-bills and in commercial papers. It is also tailor-made for the investors. You can invest in a commercial paper, denominated in dollar, sterling or euro. We swap it back into euros because it's not allowed for us to run an open foreign currency position. We have observed in auctions a quite loyal investor base. Around 50% of the investors are really rolling their positions. And that's perfect for us, that was our plan, to see some sticky investors but some new investors as well. Therefore, you see, it is not so much driven by the outright interest level.

Q: Speaking of green bonds, it has been noted that Austria has the highest share of eligible green expenditures of any sovereign green bond issuer in the world. Issuance plans for 2024 include over €6 billion of green debt, around 8% of total borrowing. Is this a proportion you would actively seek to increase in the future, or will you primarily be influenced by investor demand?

A: We are very happy with the positive development of this holistic green funding program and its solid growth over the past year especially given the impressive large volume relative to GDP. Because Austria, with 1.2%, reflects the highest green eligible expenditures within all sovereign issuers in the green world. And to give you one number, we are planning €6.2 billion this year. Normally our big neighbour Germany is 10 times bigger than Austria. So normally, Germany would have to issue €60 billion this year in the green format, but they announced only roughly €17 to €19 billion. So vice versa, we should have only €1.8 billion compared to the German volume. From this perspective, we are really thankful to the Austrian government, that is driving these green projects and green expenditures in the budget. The increase of green expenditures year by year also was the reason why we thought it would be really appropriate to have not only the green bond market but to have more instruments available for investors. If you have only €1 billion expenditures, you cannot to split this €1 billion between a bond, a bill and a commercial paper. But with €6 billion, it is possible to split. We have a targeted split of roughly 80% medium- to long-term funding and 20% short-term funding. With the rolling perspective it's like a snowball. It's getting bigger and bigger, and you have more liquidity for the investor community.

Q: Have you already outlined your plans for green bond issuance for 2025? This year it was around €6 billion. Do you expect it to increase next year?

A: It's too early to say, as we have to wait for the 2025 budget to evaluate this. Due to the elections taking place at the end of September and the following formation of a new government the new budget forecast will take a bit longer. In the meantime, the 2024 budget figures are being perpetuated.

Q: Austria is also well known for its approach towards creating and leading in innovative products, as the Bundesschatz. Are there any plans to introduce or to trial any other products that are also innovative?

A: We have one or two new ideas, but it is too early to announce it at the moment.

Q: Credit rating agency S&P Global Ratings has revised Austria's outlook to positive from stable. Are you now expecting an upgrade anytime soon?

A: In general, we are not commenting on possible actions of rating agencies, but you can read that S&P revised Austria's outlook to positive because our energy supply position versus Russia decreased because of the government’s measures as well as OMV’s, our main energy supplier. These are very good news. If you read the normal signals of a positive outlook, there is a higher probability that the rating is improved in the next 12 to 18 months. But let's see.

Q: One of the reasons, obviously, for this revision is fiscal measures. The government deficit is projected now to hover around 3% of GDP in 2024 and 2025. Do you think that this will materialise?

A: It's the task of the Ministry of Finance. They are forecasting a budget deficit of around 3%, so we believe them. So, that's the base assumption of our borrowing at the moment.

Q: The truth is that the growth outlook is not very positive for Austria. Are you expecting this period of subdued growth to be very long?

A: Yes, if you look at the forecasting institute WIFO, we might be facing a recession this year. The actual figures from June call for 0.0%, but with an expectation of a downward revision. But if you look at a positive factor, the labour market is still quite robust in Austria. Compared to the euro area, where we see 6.6% unemployment, we have 5.1%, so we are in a favourable position compared to other euro area countries. Hopefully, if we trust the forecasters, we’ll see growth next year, but we have to watch how the revision of this year's GDP will affect next year's GDP. The latest figure from June for 2025 is +1.5%, but we expect a bit of a downward path as well here.

Q: Is this a factor that you take into account for next year's issuance plans?

A: Yes, we have to take it into account. But it's the task of the Ministry of Finance to use these forecasts for their budget forecasts. And after we get a new government following the general elections at the end of September, we will go into details and calculate all our gross borrowing for next year and the next three years. So, in total, we have always a medium term of four years where we are calculating our gross borrowing and are aligning our strategy.

Q: One last question related to the Draghi report. Draghi has called for more eurobonds. Are you concerned that this could make it harder for smaller issuers like Austria to sell your bonds in terms of demand?

A: I think it depends a bit on whether it's additional supply or if it's really financing on a central basis and we will receive the money in our budget. So that's the crucial thing. It depends on the split of the demand side in their asset categories. If investors increase the fixed income ratio in their portfolios, it should not be a big problem, but if they stay at the same contribution within the budget, at some point it could be an issue and smaller issuers will suffer liquidity-wise, and we’ll have to pay higher premiums compared to the biggest issuers. But that's the open question.