MNI INTERVIEW: Little Appetite For EU Defence Bonds-Slovak DMO

The European bond market has insufficient appetite for large amounts of new issuance to fund a surge in defence and infrastructure spending, the head of the Slovak Debt Management Agency told MNI, warning of a rise in yields.

“Politicians have to be careful, because there is no additional strong demand for the bonds around the whole of Europe,” ARDAL director Daniel Bytcanek said in an interview.

“I am sure, because we are in contact with primary dealers, we are in contact with some big names of investors, etcetera. So there is no additional stored money somewhere in the boxes, that they will be ready for another 2,000 billion euros in the market,” he added.

The scale of defence and investment plans by Germany, together with a likely EUR800 billion in issuance by the European Commission and other member states, could push interest rates up, Bycanek said. (See MNI INTERVIEW: Germany Needs Favourable EU Fiscal Treatment)

“That's a large amount for the European market and I'm afraid that interest rates can go up. For the bonds, maybe the situation will not be easy in the financial market,” he noted.

Avoiding a significant increase in European yields will require a gradual approach to issuance, he said. (See MNI INTERVIEW: France Ready To Join SAFE Loan Facility)

“I'm not a big fan of new demands for money in the financial market. In case that it's needed, some politicians have to be careful in terms of Germany, in terms of support, defence expenditures,” he said.

The Slovak treasury is prepared for a situation in which borrowing costs spike as the country maintains a relatively large cash reserve, Bytcanek said.

“When something happens, the financial market will be frozen, so we will use this relatively large cash reserve to cover the cash flow of the country,” he said.

UKRAINE IMPACT

But Slovak debt also faces a risk premium due to the proximity of the country to the Ukrainian border compared to for example Portugal and Spain, Bytcanek said.

“Evidence of what I'm saying is that if you compare Estonia and Slovakia, Estonia has better rating than Slovakia. But our financing and our spread is almost the same. So in the normal world Estonian financing will be cheaper.”

Slovak 10-year bonds yield about 3.45%, compared to 2.7% for equivalent bunds, 3.25% for Spanish bonds and 3.14% for Portuguese debt.