Given that 2022 was a terrible year for bonds, sovereign, supranational and agency issuers may not have expected 2023 to get off to the flying start that it did. SSA issuers front-loaded $266.4bn-equivalent of benchmark issuance across dollars, euros and sterling in January and February, according to GlobalCapital’s Primary Market Monitor, blowing away the $196.6bn-equivalent raised in the same period in 2022. But cracks soon appeared, and while pricing data indicates conditions were still better than last year, primary market strength waned under the weight of market volatility.
During the first two months of the year, the average SSA benchmark was €2.3bn-equivalent across euros and dollars. Order books swelled on average to 3.6 times the deal size across both currencies.
Average spread tightening during book building for agency benchmarks in euros
Source: GlobalCapital Primary Market Monitor
But 2023 became a year of primary market peaks and troughs. The regional banking crisis in the US and collapse of Credit Suisse triggered a flight to quality in March but still almost shut the SSA primary market. Meanwhile, the European Central Bank began withdrawing support provided by its Asset Purchase Programme.
PMM data shows there were just 22 syndicated SSA benchmarks in euros and dollars in the month of March, compared to 49 in February and 53 in January. And this was just over half the number in March 2022.
Conditions grew tougher still. US Federal Reserve chair Jerome Powell’s ‘higher for longer’ testimony to Congress in the autumn sent tremors through a market where SSAs hopeful of dollar issuance had been waiting on the sidelines for the right moment.
Dollar benchmark issuance fell markedly in the first half of the year compared to euros, with public sector borrowers raising $132.8bn from 65 deals in the first half of 2023, versus $367.1bn-equivalent raised in euros.
Rates uncertainty and an inverted yield curve dragged down the average maturity of SSA benchmarks in the first 10 full months of 2023 to 8.2 years, versus 9.6 years in 2022.
And yet, GlobalCapital data suggests issuance conditions overall were still better in 2023 than they were in 2022, when central banks first embarked on their rapid monetary tightening cycle.
SSA euro benchmark average new issue premiums
bp
Source: GlobalCapital Primary Market Monitor
Demand from investors has allowed issuers to tighten pricing from guidance, on average, more in the first 10 months of this year compared to January-October 2022 — by 1.9bp compared to 1.4bp.
After the initial buying frenzy in the first quarter, agencies issuing in euros were on average able to tighten pricing by 3.1bp during execution in Q2, compared to 1.4bp in Q2 2022.
But cracks appeared, particularly in the euro market. After the banking crisis, smaller SSAs did not get the reception they had once received. Benchmark volumes fell from $215.9bn-equivalent in Q1 2023 to $151.5bn-equvilant in Q2 2023.
Come April, a spate of stand-out deals from big issuers caused concern. Austria lost €1.8bn of orders on an October 2053 tranche after tightening by just 1bp during execution. That included a sharp 90% drop in lead manager orders. The same week, KfW drew just €5.1bn of demand for a 10 year trade, versus the €33bn of demand it commanded for the same maturity in February.
Issuers lost pricing power as the year wore on. Supranationals could tighten benchmark pricing by 2.1bp on average in euros in Q2 but only by 1.4bp in Q3. In October it fell to 1.3bp on average.
New issue premiums rose in euros. SSA issuers paid 2.4bp of premium on average in H1 2023 and so far in H2 have paid 2.9bp. This is up from 2.8bp in the latter half of 2022, all part of a timid autumn restart after the summer lull.
