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Wall Street Journal features Stephen Pope and Spotlight Ideas

Thursday April 17th 2014


April 17, 2014, 5:55 a.m. ET

France Garners Healthy Demand For New Two-Year Bond

By Emese Bartha

France's launch of a new two-year government bond Thursday was well received on the day, with this maturity segment remaining well-supported by the European Central Bank's dovish monetary policy.

Five-year borrowing costs meanwhile fell to their lowest level since May 2013.

The auction came after French Prime Minister Manuel Valls on Wednesday laid out a series of measures to cut spending, amounting to 50 billion euros ($69.11 billion) in the next three years, as the country seeks to repair its public finances.

The French Treasury Agency said it sold a total of EUR7.940 billion via the launch of the November 2016-dated bond--known as OAT, and the reopening of the May 2019-dated bond. As is usually the case at French auctions, the allocated amount was just marginally below the upper end of the offer size, which was EUR7 billion to EUR8 billion this time.

Demand was healthy for both lines. The borrowing cost on the five-year May 2019-dated bond fell to 0.86% from 1.06% at the previous auction a month ago, reaching the lowest level since May 2013 when France sold a five-year bond at an average yield of 0.74%.

Well-performing French government bonds often aren't a good reflection of the country's economic policy, thanks to their very liquid nature and the yield premium they offer over German bonds.

Stephen Pope, managing partner at Spotlight Ideas, a U.K.-based research house, recommends investors selling two-year French debt at the current relatively tight spread over Germany, currently around 6 basis points.

Mr. Pope said that it will take a "long while" before the ECB adopts any form of quantitative easing, while the markets are "very sceptical" about French fiscal discipline. Nonetheless, he adds, France is a "safe investment" despite its economic problems.

Despite decoupling of the French bond market from the economy, France must go ahead with its reform efforts and the first steps of the new, reshuffled government offer reason for cautious optimism, analysts said.

"Although France's short-term outlook remains weak, the new French government's recent policy announcements provide hope that France is slowly tackling its significant competitiveness problems," said James Howat, European economist at Capital Economics.

The two-year OAT offered at the auction is a new issue, while the five-year OAT is a reopened issue.

The following are details of the auction, with the amounts in euros. Figures in brackets are data from the previous auction held March 20 for the five-year OAT.

At last month's auction France tapped the 2.50% July 2016 BTAN in the two-year segment, a non-benchmark bond. At that auction the average yield was 0.33%.


Issue               two-year OAT

Maturity            Nov. 25, 2016

Coupon              0.25%

Bids received       8.170 bln

Bids accepted       4.370 bln

Bid-to-cover ratio  1.87

Average yield       0.32%

Average price       99.81

Minimum price       99.79

Settlement day      April 23, 2014


Issue               five-year OAT

Maturity            May 25, 2019

Coupon              1.00%

Bids received       7.595 bln

Bids accepted       3.570 bln

Bid-to-cover ratio  2.13      (1.93)

Average yield       0.86%     (1.06%)

Average price       100.69    (99.68)

Minimum price       100.67    (99.64)

Settlement day      April 23, 2014


-Write to Emese Bartha at emese.bartha@wsj.com


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