MNI INTERVIEW: Slovenia Considers Ultra-Long Bonds- Debt Chief

Slovenia is considering issuing its first ultra-long bonds, a senior government official told MNI in an interview, as he predicted that the European Central Bank will continue to rely on its special Covid-19 measures for some time to come.

Marjan Divjak also warned the ECB not to allow the unwinding of its pandemic emergency purchase programme to become a repeat of the 'taper tantrum' following the Federal Reserve's announcement in 2013 of its intention to downsize asset purchases.

Slovenia is currently "following investors' interest in ultra-long maturities," Divjak, Treasury Director General at the Slovenian Ministry of Finance, wrote in response to emailed questions, adding that it "could be a diversification element for our debt portfolio."

"Given the current economic backdrop marked by Covid-19 and low inflation and considering the ECB forward guidance, central banks will continue with loose monetary policy for some time, with the application of measures adapted to the situation," he added.

Asked about the implications for bond markets of an eventual phasing out of PEPP, Divjak said the effects of forward guidance regarding reverse QE are "not known and experienced well," and highlighted the fall in prices and the instability arising from the Fed's 2013 communication as a source of concern.

CAREFUL WITH PEPP

"Financial stability is an important aspect when it comes to policy reversal, which the ECB is certainly aware of," he said. "So we expect a careful, thoughtful, timely and stepwise approach when the PEPP is winding up. Consequently, the impact on bond markets should be limited."

Slovenia's year-to-date issuance amounts to EUR6.7 billion, including EUR5.9 billion in bonds and EUR0.8 billion in T-bills, at an average weighted issued yield of 0.5% and average weighted time to maturity of 8 years. Another EUR0.5 billion in bonds and T-bills will be issued by the end of 2020.

"The conditions in the EUR debt market and the republic's macroeconomic condition allowed us to continue smoothening the redemption profile and forming the debt portfolio where nearly one-third of existing budget debt has residual maturity of more than 10 years," Divjak said, citing April's positive outlook rating from Moody's, and stable ratings from S&P and Fitch.

No foreign currency issuance took place in 2020, with the euro considered Slovenia's core market. "However," Divjak said, "we regularly keep an eye on other markets as well."

The choice type, structure, size and maturity of debt instruments issued next year have yet to be decided, Divjak said, with Slovenia set to decide on a 2021 budget later this year. Prevailing market conditions, investor demand, the shape of the yield curve and the liquidity of securities along the curve will all be key considerations.

"The issuance in 2021 will cover budget deficits and debt principal repayments for 2021," he continued, with euro-denominated government bonds and T-Bills the primary source of funds envisaged. At the same time, Divjak said, the possibility of pre-financing 2022/2023 debt principal repayments "will be considered in the course of 2021."