Hold On Tight: European Bond Issuance In January Is About To Get Very Bumpy

Tyler Durden's picture

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.

From UBS:

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.

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Zero Govt's picture

When you blow/piss away $490bn on propping up banks and none of the Eurozone stock markets even notice and continue their decline you realise just how worthless the Euro has become

Time to kill the Turkey at the ECB

...Fed, Bank of England and Bank of Japan to follow for the chop

Tyler Durden's picture

Please no links to unfounded hype, speculation and complete hearsay

Michael's picture

You mean like this?

| Breaking: Patriot Missiles Seized, Sold To China by Israel (Updates)

"Finnish authorities have confirmed the seizure of 69 Patriot missiles manufactured by Raytheon Corporation today. 

During a routine search of the MS Thor Liberty, a ship flagged by the Isle of Man, at the Finnish port of Kotka, authorities found 69 Patriot missiles of a type capable of intercepting ICBMs, the most modern available and America’s most sensitive military technology."

http://www.veteranstoday.com/2011/12/23/breaking-patriot-missiles-seized-sold-to-china-by-israel/

Ahmeexnal's picture

Silver market is abnormal.

What used to be a stochastic chart is now a discrete step chart. Something is about to happen, and it ain't gonna be pretty.

Most likely, COMEX has already folded like a cheap lawn chair.

Troll Magnet's picture

i've been wondering WTF all day.  anxiously waiting to find out what the deal is.

Peter_Griffin's picture

Illiquid because of the holiday.  Someone should short that bitch to $20 so I can load the boat.

High Plains Drifter's picture

yeh those sons of bitches demand that we "give them"  these advanced missles to use to protect them from those evil arabs and what does our little "friend" do?  they go and sell it to another of our "little friends" the chinese....man these people are out to lunch. of course not a word will be said. and johnny the soldier boy will continue on doing his duty to israhole and fighting and dying for nothing like the good little slaves they are and as far as the amerikan people are concerned. not a word is heard in the gulag about this. not one word ........these idiots cannot put two and two together to spite themselves.........its all very sickening...........

DosZap's picture

High Plains Drifter

Food for thought.

Why would they do it.

Stop and think about it.

Maybe there are some anomalies in these?, maybe their Salted?,maybe they are MEANT to be put into their hands.

Israel has NO reasonable paybacks for this,China supports Israels enemies,BEST bud' w/Iran,Syria,you name it.

There is more to this than meets the eye,think before you leap.Are these the real deal, are they built with ghosts in the machines?.

Why help someone who is also dedicated to helping  others to bring about your total destruction?.

High Plains Drifter's picture

oh by the way, this shit happens all the time .  anything you give to israhole will find its way out to the world arms market for sure........they are not our friends and never have been our friends and nobody in our government has the balls to say what needs to be said about these psychopaths.........not one damn person, not even ron paul......

Michael's picture

Paul knows how the game has to be played in order to win.

way-out-west's picture

great question... what exactly is "winning"? 

Xanadu_doo's picture

Solid, third-party verification to back up your included summary vs a blind link to some lunatic ravings. That's the simple difference between up arrows and downs. Cheers!

luna_man's picture

 

 

Always.........Testing!

One eye open and an ear to the wind!

disabledvet's picture

here's something that isn't and that is sorely lacking in this piece: massive asset sales. that goes a long way towards explaining the strength in the euro in my book: those transactions will be done in euros....until they aren't. once all of "europe inc." is picked clean...then what? "devalue or die"? i'm sticking by my thesis: "tanks in Athens." good article.

7thCardinal's picture

that doesn't look like an email, more like a pitch to sell some overpriced newletter subscription about the maya calendar and the end of the world..

Eireann go Brach's picture

Sunnydays.... you left out the part that Sherri just got released from Bazookas Circus where she picked up elephant dung for a living!

ucsbcanuck's picture

Leave Turkey alone - they stayed out of this whole mess and recorded 9% GDP growth!

Zero Govt's picture

sorry, should have been turkey with a lower case 't'

and no offence to Turkey who make great knock-off jeans and t-shirts 

Fips_OnTheSpot's picture

They should rename EURO to BOOM, or FIASCO ..

Sudden Debt's picture

Or Dollar!

Oh wait... That one is already taken....

aleph0's picture

Actually, the names are already figured out :

 

EuroMark , EuroLira, EuroFranc ....

trade the day's picture

I'm sure the eurousd will hit 1.35 before it hits parity.  While everyone calls for parity, it has to make/hit a few stops on the way down.

GeneMarchbanks's picture

Fed is a buyer, Dudley said so. January is in the bag...

Whoa Dammit's picture

Yep, the Bernak, Emancipator of Failed Too Big Banks will start his European shopping tour in January. 

Sudden Debt's picture

We'll print 1 trillion. The US will do the equivalent in dollars to cover it's deficit to and nobody will care once we both send troops to Iran and take our oil back, we'll pretend everything will get better... Untill it doesn't...

hnaparst's picture

OK, I give up. What is the natural hedge that we all  know?  Gold? Oil? Copper? Dollar?

hnaparst's picture

The point of writing is to convey information.  When the author says that all his readers know something, I think it is reasonable to ask for a clarification, in order to save time. 

Gold and the dollar have been falling due to risk-on.  No one seems to know if commodities are going up because of hyper-inflation or going down because of deflation.  So what's the "natural hedge", even if all this debt can't find a buyer.

By the way, it is only 2 billion more in new money than last year.  Hardly a crisis.

Schmuck Raker's picture

I'm sure Tyler was hinting at gold.

Jenks' answer has a lot of merit.

I'd suggest a Bloody Mary.

hnaparst's picture

There is no indication that all major currencies are going to experience hyper-inflation, which is what would be necessary for gold to be a winner in all currencies.

Several countries have quite stable finances, and there is no indication that they are going to go crazy and print money.  Canada, Sweden, China, and Australia come to mind.

If there is a global credit crunch like the one three years ago, or worse, deflation may be a likely outcome.

I agree that the debt burdens of PIIGS is unsustainable, and they must default eventually.  The fallout of these defaults is unclear.  It seems premature to say that it will lead to hyper-inflation and that gold will rally.  An equally likely scenario is that the actual default will lead to a relief rally and a risk-on trade, since all the bad information is already known to the market.

Ahmeexnal's picture

Another paid troll.  Seems like a whole batch of them came here 1 week 5 days ago.

No pal, no indication whatsoever that all major currencies are going to experience HI.

QE did not happen. Neither did QE2.  Europe is in perfect economic condition. So is China and Japan.

Canada you say??? That's not even a true fucking country.  RE bubble is bursting there, banks are a shitbasket, and they have next to no gold.

Australia? Same story.

Sweden? Sweden died when Olof Palme was shot point blank by the Vatican.

China? China ain't gonna help the west. Period.

ZeroPower's picture

You do realize that QE happened because of a near-deflationary state right? 

I only agree with your assessment of China. You should definitely research those other 'non-country' countries before making such claims.

 

Jack Napier's picture

Duh. You just insulted everyone's intelligence by stating the blatantly obvious. The deflation concerns aren't going away, and therefore, print once, print twice, print to infinity. Why would they change the game plan now that there is more at stake than before?

Errol's picture

While I do have a substantial position in "the natural hedge", I would like to point out that that despite Japan bailing out their banks and doing repeated rounds of QE, they have been drifting in and out of deflation for over a decade. 

The only thing I see as irresistably infationary is peak cheap oil, but even that tends to be self-limiting in that every time the price rises high enough, it pushes industrial economies into contraction (which is inherently deflationary).

qussl3's picture

Monetization of deficits is driving inflation.

Eventually, politcians will print to buy votes regardless of the true level of economic activity.

Levered assets will continue to deflate as the credit economy deflates to a more sane level.

But the cash economy will continue to experience inflation as the masses spend currency created without commensurate economic activity.

The USD has/had the luxury of exporting that inflation for years, but with the Chinese now having settlement in RMB with BOTH Russia and Japan, should they manage to finagle that with the EZ, the USD days would then truly be numbered.

The "exorbitant priviledge" may have some legs left, but that would require the destruction of competing currencies, namely the EUR, Gold and possibly the RMB or insanely enough the Yen.

The Yen is a bizzare creature, for all the govt's failings, the underlying economy produces more than it consumes, and as long the population and by extension the economic power behind it continues to accept the Yen as legal tender, it should not experience the same devaluation that will inevitably come to the USD.

randomwalker's picture

According to the IMF, Canada is the only G8 country with a banking sector and CB worthy of the name. Bubble burst WILL happen in Vancouver; we can thank the Chinese for that. Has Ft Knox been audited lately without anyone knowing???

hardcleareye's picture

The ratio of debt to personal disposable income hit a high of 152.98 per cent in the third quarter from 150.57 per cent in the prior three months, Statscan said Tuesday. The report comes as Bank of Canada Governor Mark Carney is again sounding the alarm over swelling household debt. “Our greatest domestic risk relates to household finances,” the central banker said in a CBC radio interview.

Roughly one in 10 Canadians is in a vulnerable financial position, Mr. Carney said – meaning that the cost of servicing their debt consumes more than 40 per cent of their income – “and that, historically, is where people start to have issues in making their debt service payments.”

If commodities dive and the US goes into a serious double dip recession/depression, Canada is fucked......

Stupid dumb shits, they watch the US implode on a real estate bubble than they go out and copy the same crap,,, just Canadian style.....  makes you just kinda sadly shake your head. 

Furthermore. the Chinese didn't have anything to do with this but maybe the Harper government did......

ucsbcanuck's picture

"Stupid dumb shits, they watch the US implode on a real estate bubble than they go out and copy the same crap,,, just Canadian style.....  makes you just kinda sadly shake your head."

Yeah, but listening to people up here - "We're different." "We won't go through what the US went through" - the hubris and superiority complex vis-a-vis the US up here is unbelievable

disabledvet's picture

i'll give you two right off the bat: natural gas plays and info tech. the demand for both is basically "infinite" right now. at some point i will add a third in solar power...as at some point the sheer "low-ness" of the price...especially vis a vis the performance of said panels which apparently is surging as well... will create extraordinary demand at the consumer level. Still haven't seen anything at Lowe's or Home Depot however...the longer the crazies wait for the "energy induced economic collapse" however...

ucsbcanuck's picture

What's the best way to get into natural gas? Any good ETFs?

hnaparst's picture

Finally an intelligent comment.  Basically, this is Marc Faber's position.  Equities, energy, and real-estate, which have intrinsic value.  The only criticism is that demand can be soft for a while in the event of a slowdown.

peekcrackers's picture

Will this be the year the word "quadrillion" is used 

Trillionss are adding up

Zero Govt's picture

...and then it all resets to zero

it's a funny old game

tim73's picture

"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."

So it is better to issue NEW DEBT on top of the existing pile faster and faster like USA is doing? Rollover is not a problem unless the EXISTING bond buyers refuse to rollover and I do not see that happening.

q99x2's picture

"...readers know what the natural hedge to a resumption of the race to the bottom is."

Canned Tuna, Fishing Line and Firewood.

San Diego Gold Bug's picture

Will 2012 be the year that the giant Ponzi scheme unravels?  Hyperinflation is lurking just around the corner!

hnaparst's picture

Sure.  Or deflation.  Or maybe the single digit inflation we have now.  Let me know when you know which catastrophe it is going to be.