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By John Geddie
LONDON, Aug 27 (IFR) - The European Financial Stability Facility is looking to take advantage of a back-up in rates to tempt insurance and pension funds to buy its new 21-year bond, expected to go on sale on Wednesday, bank sources close to the deal said.
The eurozone rescue fund, rated Aa1/AA+/AA+, has hired Barclays, Deutsche Bank and RBS to sell the bond, which matures in September 2034 and which is expected to price with a reoffer yield of over 3%.
Books are expected to be formally opened for sale on Wednesday morning, for pricing later in the day.
The low returns from government bonds in the year to date have frustrated accounts with long-term investment horizons, but a recent sell-off stemming from concerns around US Federal Reserve tapering of its bond-buying programme have opened up new opportunities.
"The EFSF has been looking at this for a long time, but the sell-off over the summer has made this deal a real possibility without the issuer having to pay a huge premium," said one banker managing the deal.
10-year Treasury bond yields have sold off over a point since the start of May, hitting a high of 2.9% last week. Similarly, the European benchmark - German Bunds - have sold off around 80bp over the same period, coming up just shy of 2% last week.
A supranational issuer like the EFSF, which offers long-term loans to eurozone member states in financial difficulty, has a natural need for duration in its funding programme.
But after ECB president Mario Draghi removed much of the assumed tail-risk in eurozone government bond markets in October last year by promising to buy the debt of struggling countries, yields tumbled, dulling appetite for long-term bonds.
EFSF last issued a bond with a maturity longer than 10 years in June 2012: a 3.375% April 2037.
With the recent rise in yields, however, banks managing the deal now believe there is enough appetite among investors to raise up to EUR2bn via the new bond sale, with a minimum EUR1.5bn deal envisaged.
A handsome new issue premium should provide additional incentive.
EFSF's closest outstanding bonds by maturity - the aforementioned 3.375% April 2037s and the 3.875% March 2032s - were both bid at around mid-swaps plus 30bp when the new deal was announced on Tuesday afternoon.
Banks are marketing the latest paper to investors with initial price thoughts of mid-swaps plus 40bp area, indicating a pick-up for investors of some 10bp.
While Dutch, German and Italian pension and insurance funds are tipped to be the main buyers, the deal is likely to come too tight for their French counterparts.
French investors have historically only bought EFSF bonds if they offer a pick-up to French government debt. This deal, however, is coming around 10bp through an equivalent French government bond, said the lead manager. (Reporting by John Geddie, editing by Philip Wright and Natalie Harrison)