Cyril Regnat: « Several institutional investors continue to buy French Treasury Bills»

Next-Finance: What do you think of negative rates BTF issued by the French Treasury? Are we in a full bubble?

Cyril Regnat: I do not think this is a bubble. The current situation is, in fact, the result of a triple phenomenon:
 Firstly, the accommodative policy of the European Central Bank, through its policy of massive injections of liquidity,
 Secondly, the fact that the French debt is extremely liquid and appear good "quality" in the eyes of investors, despite the recent deterioration of the financial rating of France by Standard & Poors;
 Finally, the high cost of other instruments on the Treasury bills market, namely German Bu bills.
Moreover, despite the negative rates currently displayed by the BTF, a number of institutional investors, particularly asset managers keep buying these securities. The reason is simple. They are required to hold a certain amount of French securities in their portfolios, even losing money, like now!

Next-Finance: Some sovereigns have adapted their strategy to all the two ECB 3 years VLTRO and opted for a lower maturity of their securities. That of France is about 7 years and the French Treasury Agency (AFT) has not chosen to reduce the maturity of its securities, is this a good strategy in the current context?

Of course, at first glance, it would seem appropriate for France to reduce the maturity of its securities to benefit from the very attractive levels observed on the short term interest rates market, that is to say, for maturities of up to 3 years. Yet, despite the current situation, the AFT has chosen to maintain a "classic" and transparent policy of issuing securities, like Germany, unlike Italy or Spain.

In my opinion, the strategy followed by France is correct. In effect, any lowering of maturity necessarily result in burdening the future financing needs of the country concerned, to the extent that the State is then obliged to "roll" more frequently its maturing bonds, which is not always evident regarding the market conditions. Also, we must remember that the AFT benefits from the particularly interesting funding conditions on long maturities.

In a financial crisis, it is preferable for a country that public debt is held by domestic investors. This effect allows it to be more resilient to financial shocks that may occur because during stress period, the non-resident investors are often the first to sell their bonds.

Cyril Regnat

Next-Finance: Facing sovereign risk, some politicians have called for "financial patriotism" by encouraging domestic investors to invest in the debt of their country. The new regulations also seem to promote this aspect. Should we welcome a renationalization of sovereign debt? What portion of the French debt is held by foreign investors? What should be the ideal proportion of percentage of debt held by domestic and one owned by foreign investors?

In a financial crisis, it is preferable for a country that public debt is held by domestic investors. This effect allows it to be more resilient to financial shocks that may occur because during stress period, the non-resident investors are often the first to sell their bonds. This is also what was observed on Italian and Spanish debt on which we have seen a partial withdrawal of non-residents.

Moreover, the best example is probably Japan displaying extremely low interest rates levels on its government bonds despite a public debt ratio higher than Greece, more than 200%. It must be said that Japanese investors have much to do, holding almost all of the national debt.

A situation that is far from the case in France since the share of non-residents is 63.8% at the end of the first quarter of 2012, down from70.6%, their highest level ever, reached during the second quarter of 2010. Anyway, these figures remain relatively high, exposing France to the ups and downs of foreign investor’s moods in case of stress on the debt.

There is not really an ideal proportion for holding national debt between domestic and non-residents, but it is clear that a high percentage of domestic investors is preferable during stress period, as shown in the example of Japan. During calm period, a more balanced ratio helps by immunizing against a change in household savings behavior.

The point of view of Bill Gross on inflation does not seem to be shared by sovereign issuers. Over the last years, the main treasures have decreased or at best stabilized the proportion of indexed securities in their funding program.

Cyril Regnat

Next-Finance: According to Bill Gross, CEO of PIMCO, inflation is a major threat that weighs on the portfolio long-term bondholders. Is it not necessary for sovereign issuers and the AFT in particular to increase their program of inflation-indexed bonds in response to these fears?

The point of view of Bill Gross on inflation does not seem to be shared by sovereign issuers. Over the last years, the main treasures have decreased or at best stabilized the proportion of indexed securities in their funding program. The French Treasury has not revised upwards its program of inflation-indexed bonds, which stabilizes for several years at about 10% of the total issued annually. The ECB, whose mandate is to ensure price stability in the euro area is certainly linked to this policy.