AFT to capitalise with green linker as inflation demand hots up

Divergent inflation expectations bring more opportunities for 2022

The Agence France Trésor will issue its first ever green government bond (OAT) linked to an inflation index in 2022. Bankers believe demand for inflation-linked products is on the increase.

The AFT announced this week that it will examine the possibility of printing a 10- to 15-year inflation-indexed green OAT – its first green bond in the format.

The AFT’s borrowing programme stipulates that it raise approximately 10% of its funding in inflation-linked format – a mark it has not hit since 2018. The AFT’s funding programme is €260bn, implying €26bn in inflation-linked format.

‘The AFT would have liked to do more inflation-linked funding over the past couple of years,’ said a sovereign, supranational and agency syndicate banker.

He added that he believes there will be opportunities for more linker supply in 2022. ‘There’s divergent views on the inflation outlook, and that means there’s the opportunity,’ he said. ‘Ultimately, for investors in these products, it’s about their expectations of inflation and their assessment of the value of breakevens.’

The resurgence in inflation has already opened up some of these opportunities, with AFT’s supply in the product climbing from under 8% of its programme in 2020 to over 9% in 2021, according to AFT’s data.

Central banks, including the ECB, are grappling with inflation that has returned much more strongly and rapidly than expected in the wake of the stimulus measures and supply chain disruptions of the past two years spent fighting the pandemic.

Euro area inflation was 4.9% in November, up from 4.1% in October – well ahead of the ECB’s 2% target, although it says its accommodative policy is still needed ‘for inflation to stabilise’.

‘Investors have different views on the degree to which the present inflation will be sustained,’ said a second banker. ‘It’s the hot topic and we’re getting more questions about the products. I wouldn’t be surprised to see other sovereigns following suit.’

The inflation-linker market is primarily dominated by sovereigns. ‘I don’t expect to see other issuers capitalising,’ said a head of SSA debt capital markets. ‘It’s a complex product and it’s not something you can decide to issue quickly. The sovereigns are set up for it, and they’re the ones that will take advantage of increased demand.’

However, while the AFT is stepping up its activity in linkers, not everyone is going the same way. The German Finance Agency (Finanzagentur), which published its funding programme yesterday, is not issuing any inflation-linked securities via syndication, having completed one 10-year linker syndication this year.

It will raise the same amount with linkers as in 2021: between €6bn and €8bn out of a funding programme of approximately €201bn-€203bn.

Lewis McLellan is Editor of OMFIF’s Digital Monetary Institute.

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