Yield’s drop to 3.8% at today’s 7-year government bond issue (Update-2)

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(Adds updated information in first paragraph)

By Stelios Orphanides

Cyprus tested today international markets for the first time after completing its adjustment programme  with the issue of an up to €1bn seven-year bond which led to a slight decrease in borrowing cost, a source familiar with the situation said.=

The average yield of total subscriptions which reached €1.26bn was 3.8 per cent exact, the source, speaking on condition of anonymity, said. The exact amount the government will borrow remains currently unknown. JP Morgan, Morgan Stanley, Barclays, Societé General and VTB Capital were the lead managers who invested a total of €55m in the new issue.

The book was opened in London earlier today and closed early this afternoon, less than a month after the Brexit vote which upset financial markets, the source said. Demand pushed yields which were set initially at 4 per cent as “pricing guidance” soon downwards, the source added.

The last time the government issued a seven-year bond was in May 2015 when it borrowed a total of €1bn at an average yield of 4 per cent. The bond was traded today at 3.29 per cent, according to a Bank of Cyprus statement seen by the Cyprus Business Mail.

The finance ministry’s step to tap markets, at a time uncertainty caused by Brexit and the attempted coup in Turkey, was “gutsy,” he said. “We are curious how markets will react”.

It is Cyprus’s first market test after regaining market access in October with the issue of a €1bn government 10-year bond at an average yield of 4.25 per cent. The bond which matures in November 2025 was traded on Tuesday morning at with 4.76 per cent yield on the secondary market, having risen above the 3.8 per cent mark a few days after the British referendum before falling again to pre-referendum levels days later.

Cyprus’s highest sovereign credit rating is a BB- from Standard & Poor’s which is three notches below investment grade. The credit rating assigned by Fitch Ratings, Moody’s Investors Service is B+ and B1, both four grades into the junk area, while that assigned by DBRS is B which is five notches below investment grade.

Germany’s 10-year government bonds were traded today at a -0.02 per cent yield while those of France, Italy and Spain at 0.21 per cent, 1.25 per cent and 1.24 per cent respectively, according to the Bank of Cyprus statement.

President Nicos Anastasiades declined to comment to a journalist’s question on Monday about Cyprus’s bond issue.

The government, which aims at generating a balanced budget this year, posted a deficit of 1 per cent of economic output last year caused mainly by financial support extended to the Cooperative Central Bank in December.

The government which had at the end of June almost €1bn deposited at the Central Bank of Cyprus and is facing up to €0.8bn in total maturities this year and less than €0.5bn in 2017, is likely to use the sale of the bond to smooth out 2019 and 2019 maturities which together total almost €4bn.

 

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