In euro zone first, Finland could sell syndicated bond with negative yield

By Abhinav Ramnarayan

LONDON (Reuters) - Finland could launch a new bond as early as next week, three banking sources said on Thursday, a deal that could mark the first euro zone sovereign syndication with a negative yield.

The country is believed to be considering whether to issue a seven-year bond, which would almost certainly carry a negative yield, or go longer to avoid testing its investor base in this manner.

While countries such as Germany have auctioned debt with negative yields, Finland would be the first euro zone country to do this via syndication, a process by which a group of banks distribute bonds to investors.

The euro zone bailout fund ESM and German development bank KfW have sold syndicated bonds at negative yields, while Poland last year sold Swiss franc debt via syndication that yielded less than zero.

Three bankers in talks with Finland told Reuters on Thursday that a bond sale was imminent, but were divided on what tenor the country should choose.

Two of the bankers said there would be sufficient demand for a seven-year bond even at negative yields.

"We are living in a negative-yield world now, people are comfortable with it and are looking at relative value to German Bunds," said one of the bankers.

A second said a five-year bonds issue from KfW in July, which received more than 8 billion euros of orders at a yield of minus 0.196 percent, was evidence that such demand existed.

A third banker disagreed.

"These levels at the short end are insane - I am not convinced (a seven-year deal) would work so well. We are certainly not recommending it," he said, adding that a longer-dated bond with a positive yield would meet stronger demand.

Finland in June said it was likely to sell a five-year bond after the summer break, although it had not excluded selling a longer-dated issue.

Its current benchmark five-year bond is yielding below the deposit rate at minus 0.435 percent, according to Tradeweb, making it ineligible for the European Central Bank's quantitative easing programme, as the central bank only buys bonds trading above the deposit rate.

As this is seen potentially having an impact on demand, expectations for the maturity of the new bond have shifted to seven years. Finnish debt is positive yielding from the 10 year point onwards.

"We could imagine (Finland) moving out towards the seven-year tenor, given that five-year rates trade below the deposit facility rate threshold for ECB purchases," strategists at ING said in a note on Tuesday.

Finland's outstanding bonds maturing in April 2023 were bid at a yield of minus 0.27 percent on Thursday.

Central bank action across the world has pushed yields down globally, while a flight to safety bid from investors on the back of concerns over global growth have also added to the low yielding environment.

The global amount of negative-yielding government bonds were $11.4 trillion on Aug. 2, according to Fitch Ratings.

(Reporting by Abhinav Ramnarayan; Editing by Alison Williams)