Restrained SSAs will be rewarded in 2024
Public sector borrowers coming off the January high with larger amounts of funding done than in previous years should not change tack now
Public sector borrowers have enjoyed fruitful conditions in the bond market in the first month of 2024. Pragmatic pricing, a supportive near-term rates outlook, and plentiful investor cash, not to mention a glut of fast money, have landed issuers with record order books.
Borrowers have been able to take larger sums out of the market than in previous years, and have done so in part, bankers say, to get ahead of potential volatility in the second half of the year. The market is still price-sensitive, and as issuers approach their second and third deals of the year, those that adopt a consistent and fair approach to pricing their bonds will likely be rewarded.
Market predictions surrounding central bank rate cuts are expected to continue to cause volatile moves in underlying markets in 2024. Participants are also closely watching the European Central Bank as it prepares to curtail reinvestment of coupons and maturing bonds this summer under its Public Sector Purchase Programme (PSPP) and the Pandemic Emergency Purchase Programme (Pepp). Some banks predict the end of the latter could come much sooner than the current deadline of December.
Geopolitical events and political risk remain elevated, as war in Ukraine and the Middle East persist. In addition, 64 countries plus the European Union, will hold national elections this year. There are also events that the market cannot plan for. Those issuers that front-loaded in the first quarter of 2023 were rewarded as market conditions became increasingly difficult following the March banking crisis that unfolded in the US and Europe.
Net of ECB flows, the SSA market is set for a record year of issuance. Bank of America expects gross bond issuance from European supranationals and euro area agencies to reach €500bn this year across currencies, up €65bn versus 2023.
Issuers have been adopting a pragmatic approach so far this year, opting to leave, on average 2.7bp of premium on the table for investors, according to GlobalCapital's Primary Market Monitor, instead of squeezing pricing too hard.
Premiums are often slightly elevated at the start of the year as issuers come in droves to the bond market. But now that the first wave is done, there is no cause to change tack. Market sentiment can switch fast and with so much supply having come through the market already in euros, issuers don't want to be caught on the tail end of a period of market saturation. Issuance windows are slim enough as it is, particularly with a relentless feed of fresh economic data and the European Union's syndication schedule to work around.
SSA deals have gone well so far and issuers are working their way through their funding programmes at pace. The Council of Europe Development Bank, for example, is nearly 50% done, while The European Investment Bank has completed more than 20% and the European Financial Stability Facility 35%.
But that is no cause for complacency. While issuers must always seek the tightest price for their borrowing, they must not be lured into short-term savings that end up costing them more in the long-term if investors feel they have been taken advantage of.