There were sighs of relief from SSAs last week when the European Union, one of the largest public sector borrowers, announced a €40bn borrowing requirement for the second half of the year — lower than many had anticipated. And it isn't just the EU that has cut its issuance forecast; Germany and Portugal have done the same.
Less is certainly more for the EU, which has enjoyed spread tightening since, particularly at the long end of the curve. The supranational has been working on lowering the premium it pays over core European sovereigns.
But the same also applies to the broader SSA market, which was stuffed with bonds over this year.
Concerned issuers, having experienced an unexpectedly difficult second half of 2022, started this year on a cautious note, front-loading issuance more than usual while offering higher new issue concessions. Most SSAs have funded 60%-70% of their annual targets already and some have done more.
While new issue concessions soon came down after January, there was still 20% more issuance in the first half of the year from SSA s compared to the same period last year.
That allowed investors to be picky. They had less compulsion to but knowing that, as rates rose, a few weeks later could get hold of similar bonds paying better returns.
This forced issuers to adjust their expectations around pricing, deal size and duration, favouring those that were more pragmatic in their approach.
But as they faced smaller order books and increased price sensitivity, SSA issuers and their dealers had to compromise to achieve size and good pricing, while ensuring secondary market performance.
But the ball could be back in the issuers’ court after the summer. Not only are they well advanced in their funding plans but a quiet few weeks in the primary market over July and August will leave investors' cash piles replenished, giving them more reason to buy bonds than any inflation or central bank data points give them cause not to.
Reduced issuance, in particular from EU syndications, will also restore greater flexibility over what deals other borrowers can bring and when, knowing they don't have to dance around the jumbo borrower to the same extent.
If investors do spend their summer on the beach, they will need to be fully refreshed by the time they return in the autumn, because they will have a scrap on their hands for allocations in the SSA market.