While someone continues to guietly push the EUR offer ever higher in the quiet holiday session, the reality is that with only 5 days to go in 2011, the holiday for Europe is ending, and "the pain"TM it about to be unleashed. All 740 billion worth of it. Because while Japan is monetizing its deficit (and having to issue more debt than it collects in taxes), and America is hot on its heels (as a reminder the US also issues roughly one dollar of debt for each dollar in taxes collected), Europe is still unsure whether it will monetize explicitly (that said, we did clear up that little bit of confusion over implicit monetization, with the ECB's balance sheet having exploded by €500 billion since June, or more than all of QE2). Unfortunately, as the following analysis from UBS indicates, it won't have much of a choice. Here are Europe's numbers: €82 billion in gross debt issuance in January, €234 billion in gross debt issuance in Q1, €740 billion in gross debt issuance in 2012. And then it really picks up because what is largley ignored in such "roll" analyses are the hundreds of billions in debt that financials (i.e., banks) will also have to roll in 2012. In other words, the biggest risk for 2012, in our humble opinion, is that the global repo perpetual ponzi engine (where every primary dealer buys sovereign debt than promptly repos it back to its respective central bank, and courtesy of Prime Broker conduits is allowed to do so without ever encumbering its balance sheet - explained in detail here) is about to choke.
Yes, ladies and gents, the trillions and trillions in total financial, non-financial, government and household debt that are finally coming due will need to find willing hosts wherein to gestate. Alas, said hosts are rapidly disappearing, and as hard as they may try, the global central banks are failing at being willing replacements to the traditional repo ponzi mechanism. But back to the imminent surge in bond issuance of €720 billion which UBS has the following words to describe: "Given the contraction in the investor base for most Eurozone sovereigns on the back of the increased market volatility and spread widening experienced by most issuers, we expect funding conditions to be quite challenging next year. We expect the majority of the issuers to front-load supply in the first three months of the year and to bring to the market a number of new lines with large initial outstanding amounts." Sure enough, enjoy the holidays, because in January things are gonna get very rough: "we expect January to remain the busiest month despite a EUR 5bn reduction in bond redemptions from EUR 63bn in the first month of 2011 to EUR 58bn expected for January 2012. Consequently, net issuance in January is expected to be particularly heavy at EUR 24bn vs. EUR 22bn in 2011." In other words: hold on tight.
We expect issuance of coupon bonds in the first quarter of 2012 to decrease only slightly compared to the same period in 2011. Supply in the first quarter of 2012 is likely to total around EUR 234bn vs. EUR 242bn recorded in Q1 2011. The amount corresponds to around 32% of the overall annual bond supply. Issuance will remain heavy in the first quarter despite an expected reduction in net borrowing by the EMU issuers in 2012 due to significantly higher first quarter redemptions which will increase from EUR 136bn in 2011 to EUR 157bn in 2012.
Given the contraction in the investor base for most Eurozone sovereigns on the back of the increased market volatility and spread widening experienced by most issuers, we expect funding conditions to be quite challenging next year. We expect the majority of the issuers to front-load supply in the first three months of the year and to bring to the market a number of new lines with large initial outstanding amounts.
Yes, that means Q1, and specifically, January.
Of the EUR 234bn of bonds likely to be sold in Q1, around EUR 82bn will be issued in January alone. The monthly gross supply is then expected to decrease slightly to EUR 75-76bn in both February and March. The figures compare to an aggregate issuance volume of EUR 85bn, 78bn and 80bn in the first three months of 2011, respectively. As a result, we expect January to remain the busiest month despite a EUR 5bn reduction in bond redemptions from EUR 63bn in the first month of 2011 to EUR 58bn expected for January 2012. Consequently, net issuance in January is expected to be particularly heavy at EUR 24bn vs. EUR 22bn in 2011.
The increased flexibility in the funding strategies of the issuers, which aims at dealing with an expectedly challenging primary market particularly at the beginning of next year, makes it difficult to forecast the likely issuance patterns of the issuers as the reliance on funding via tap auctions of off-therun bonds will probably increase.
For an increasing number of issuers this will affect the regularity of the re-openings of benchmark bonds and consequently the timing at which new lines will be brought to the market to replace ageing issues. Also, issuance activity will likely become more dependent on changing market conditions and on meeting investors’ demands for specific issues which are hard to forecast ex ante.
A detailed look at January, going down country by country,
Our key bond supply assumptions for January 2012 and the major issuance highlights expected during the quarter are summarized below on an issuer by issuer basis.
During the first quarter we expect further re-openings of the o-the-run 2Y, 5Y and 10Y bonds for EUR 5-6bn and we expect a new 2Y Schatz 03/14 to be launched in late February (EUR 6bn). Therefore we expect Germany’s bond issuance in January to total EUR 21bn and to decrease to about EUR 16bn in February and March.
During the quarter we also expect the launch of a new 10Y OAT most likely on Feb-2 (EUR 5.5bn). This, together with regular re-openings of the 2Y, 5Y, 10Y and longer dated benchmark issues as well as an extensive tapping activity of off-the-run bonds as in 2011 should result in a monthly supply of about EUR 18-19bn in February and March. A new 15Y line could be launched in Q2.
During the quarter we expect the launch of a new 5Y BTP in February (EUR 4-5bn). After the EUR 16- 17bn issuance volume expected in January, Italy’s supply is expected to rise to EUR 18-19bn in February and March due to the heavy bond redemptions of about EUR 26bn and 27bn expected in second and third month of the quarter.
During the quarter we expect the launch of a new 3Y Bono, most likely in February (EUR 4bn). Spanish supply is expected to average between EUR 7-9bn in the remaining months of the first quarter.
The Netherlands also announced a tap of the DSL 01/17 which has been scheduled for February 14 and a tap of the new DSL 04/15 for March 13 (EUR 3.5bn expected for each tap). In addition Holland will launch a new 10Y DSL and a new 20Y DSL in the first quarter. Given the absence of off-the-run tap auctions in the Dutch supply calendar in February and March, we expect the new 10Y DSL to be issued via DDA in late February and the new 20Y DSL to be sold via DDA in late March for a likely EUR 5-6bn each. As a result Dutch supply should total EUR 6bn in January and EUR 9.5bn and 8.5bn in February and March, respectively.
And the non-cores:
- Belgium: We expect Belgium to launch a new 10Y OLO via syndication in January (EUR 5bn), therefore no tap auctions should be expected during the month. After this, Belgium is likely to reopen its 5Y, 10Y and 15Y benchmarks as well as off-the-run issues for an amount of around EUR 2.5bn per month.
- Austria: We expect Austria to launch a new 30Y RAGB via syndication in January for a likely initial outstanding of EUR 4bn, replacing the old 30Y RAGB 03/37. The current 5Y, 10Y and 15Y RAGBs still have relatively small outstanding amounts of EUR 7-8bn and are therefore expected to be tapped regularly throughout the quarter, possibly in combination with small off-the-run lines with lower outstanding amounts for an average monthly volume of around EUR 1.5bn per month.
- Finland: In the first quarter Finland may sell an additional EUR 1.5bn of the current 5Y RFGB 1.875% 04/17 which was launched in September and we also expect the launch of a longer dated issue (most likely a 10Y bond) in mid March for an expected EUR 4bn. Finland is likely to sell 2 new benchmark bonds in 2012 (one in H1 and one in H2, the latter being most likely a new 5Y bond) and to hold 4 tap auctions during the year. The 5Y bond could be re-opened further by EUR 1bn in H1 to reach a final outstanding of EUR 6.5bn while the remaining 2 taps would increase the outstanding amount of the two lines launched in 2012.
Needless to say, the biggest problem for Europe is that unlike other countries, the bulk of the issuance is not to fund net debt (thus new "growth" however Keynesians define this), but merely to roll existing debt, which does nothing for incremental ecnomic growth, but merely avoids systemic insolvency. Alas, as rates keep on creeping higher and higher, this is with 100% certainty a game that the status quo will lose.
Furthermore, with France just announcing the highest unemployment rate since 1999, the realization that new incremental debt has to be issued will dawn quite soon. Alas, with everyone already monetizing their own, the only option will be for the ECB to join the party. Which is why we are confident that the ECB will, if not so much to bail out its banks, as to provide bond demand of last resorts (also known as monetization), very soon enter the printing party. Luckily, by now we are confident all readers know what the natural hedge to a resumption of the race to the bottom is.