It is still full steam ahead for the SSA market with issuers continuing to find a strong bid for new bonds across currencies and maturities. But bankers this week flagged signs of investor "resistance" against the tight levels in both the dollar and euro markets. However, not only do investors still have plenty of appetite for paper at the right level, issuers are finding they can rely more on so-called fast money demand to clear their deals without compromising on secondary performance.
“We normally have a lot of supply at the beginning of the year but I’ve never seen such a start like this year’s,” said a funding official with 25 years’ experience. “The market’s hunger for bonds is really astonishing. It is completely on fire, but it’s probably close to the melting point, I’d say.”
A second senior funding official recalled that in early to mid December, he began discussions with dealers and peerss regarding who would bring their trades first, or take which windows come January. “It never happened — not that early, anyway,” he said.
But some worry that issuance conditions might start to weaken soon. While acknowledging that all deals were going well, a head of syndicate said there was “a bit of resistance in dollars, which is not surprising given the tightness in spreads”.
In euros, the first wave of deals like European Investment Bank's and KfW’s 10 year bonds started to widen this week, and many new issues over the past couple of days have struggled to perform.
“We seem to be reaching some resistance levels and at some point people could be saying these valuations are too tight,” said a syndicate banker in London.
The dynamic in secondary markets is thought to be due to a combination of factors: the incredible amount of issuance that has been priced already this year, and is still being digested; the tight pricing in primary in the first place; and the fact that swap spreads wobbled this week — dragging SSA spreads wider versus swap rates.
“There are a lot of switches going through the secondary market and not that much follow-through buying of new bonds,” noted a senior banker in Europe. “It certainly is a theme, but it seems to be stabilising.
“Because of the strong demand and results we’ve seen, some issuers are starting to go a bit too far with the spread tightening. So far, the benchmark borrowers have been quite well behaved. But some of the smaller ones are starting to push.”
A second syndicate banker thought “a bit of normalisation” had been going on. “Usually, this happens after very strong demand after the first day or the first few trades. It isn’t a bad thing, nor is it unexpected,” he said. “Historically, spreads are still very, very tight in the euro market.”
The senior banker added that there was yet to be “a trade that doesn’t work”, meaning one that was not fully covered — or even pulled. “It will come at some point, and there will be saturation,” he warned.
Not so fast
But for now, despite the secondary market fluctuations, SSA bankers stressed that demand remains strong for new issues across both real money and fast money investors.
Of sovereign order books in particular, one SSA DCM head said volumes had been similarly huge compared to January 2025. “The books are still inflated by very large hedge fund orders, but on average there’s more quality in the books than last year,” he said.
“You see all these huge books and it doesn’t take a rocket scientist to work out there’s a lot of hedge fund money," added a senior origination banker. "But the amount of high quality, real money interest in these trades has also been phenomenal.”
The SSA market has traditionally used the term fast money to refer to investors like hedge funds and bank trading desks, which focus on selling bonds allocated in a syndication, or that they buy shortly afterwards, quickly for a profit. Although they can provide liquidity in a new issue, their allocations are often scaled back to prevent too many bonds from being traded in the market, therefore cheapening them.
By contrast, so called real money accounts such as central banks, asset and fund managers and pension funds typically hold their allocation for longer, do not look to trade opportunistically, and therefore limit the supply of bonds in the market, driving their valuation up.
One senior SSA funding official highlighted the amount of hedge fund interest in the SSA market over the past year or so, referring to it as “the elephant in the room”.
“There are several that have been building up their SSA strategies,” she said. “We have had meetings with a number of them, and they are not as fast as the fast money used to be, so you cannot put everyone in the same basket. They are momentum buyers and everybody acknowledges that. But they do help the trades overall, regardless of the market backdrop.”
One mid-sized issuer in Europe said he saw hedge funds holding his institution's bonds for a couple of months — sometimes for as long as six — before selling. “It is understandable that they would want to make a profit with it when they see the opportunity,” he added. “But it is really helpful compared to their old behaviour of [flipping the bonds] within days, if not hours.”
This issuer noted that the quality of hedge fund orders was better in dollars compared to euros. But overall, "today’s fast money isn’t the same as it was one or two years ago,” he said. “Some of them are currently behaving like tier two bank treasuries and not really like hedge funds.”
An SSA issuer from outside of Europe said one fund had held its bonds for 2.5 years and counting. Another added that some hedge funds had committed to a minimum holding period for the bonds in their portfolios, ranging from 30 days to six months.
“I don’t think we should call some of these investors fast money anymore,” said a supranational issuer. “It is the tradition, but what we are seeing now is that investors’ behaviour — whether they are fast or slow — doesn’t depend on what type they are anymore.
“Slow hands can be much faster than expected, and the so-called fast money can also turn out to be quite committed.”
He added the change has been gradual. “[Over the years we saw] some of these hedge funds coming into our transactions — be it the really strong ones or the more difficult ones — very regularly,” the issuer added.
“We have gradually increased allocations to hedge funds over the years… They do hold our bonds, although the flows aren’t as big as we see from other types of investors.”
Differentiation matters
The SSA market is increasingly acknowledging the importance of hedge funds and starting to treat them “very differently”, said the senior origination banker. “Clearly, they are a massive source of liquidity in the rates market,” he added. “A lot of ex-SSA traders or bankers are now running the portfolios so they know the sector very well.”
Similarly, the SSA DCM head noticed “a better understanding on the Street” of hedge funds and their different strategies. “Some issuers have actually started this year to differentiate between hedge funds and give some portfolio managers higher allocations than others — the ones that they know and trust,” he said. “That contributes to the slightly higher hedge fund allocation on average that we have seen this year.”
Another important change, said an issuer in Germany, was that some hedge funds have stopped inflating their orders — something they were notorious for. “Some actually explained to us that when they put in, say, a €300m order, they are happy to get it in full,” he flagged. “They are no longer putting in €300m while only aiming for €5m and afraid of getting any more than that.”
The non-European issuer said hedge funds were important investors and his team wanted to “build a dialogue” with them. “I don’t think they are all synonymous with fast money,” he added.
Hedge funds could be divided into three categories, in his view. First there were the old-school traditional hedgies that focussed on harvesting new issue premiums and therefore tend to hold bonds for a short time. Then, there were the relative value players that assess the whole curve and even cross markets. Finally, there were those harvesting carry and rolldown. It is this group the issuer said was the one that had grown the most and held bonds for the longest. “They are very careful about markets they can get [the carry and rolldown] from," he said. "They have been more prevalent in Australian dollars, and in sterling it comes and goes.”
Carry is the profit earned from the yield of the bond less the cost of financing the position, while rolldown is the appreciation over time of the bond price as it nears maturity from the tendency for short-dated yields to be less than longer ones on a normal yield curve.
‘Reliability’ is key
While still not a core investor group, SSA issuers said they were willing to “highlight” or “reward” those hedge funds that have in the past shown liquidity commitment with allocations — even when allocations were tight.
The mid-sized issuer said in his recent deal, despite it being many times oversubscribed, three to four hedge funds that had been “reliable” still received allocations, albeit not necessarily in full. Another six or seven were allocated nothing.
The issuer in Germany said he continues to engage with 15-20 of the largest hedge funds globally in his transactions, on roadshows or through other meetings.
“It really depends on the person," said another large European issuer. "It could be an asset manager or hedge fund, but there are plenty of shades in between. It really depends on the specific PM.
"We started years ago to have close relationships with the PMs and understand how they behave,” he added.
Helpful, but not core yet
A syndicate banker admitted that while a few hedge funds were “really making an effort” to promote themselves to the sell-side, “they are still not the hold-to-maturity type, but they can still be helpful for example when it comes to giving feedback to your pricing thoughts”.
While agreeing those hedge funds’ feedback was helpful, the SSA DCM head stressed that trades were still not being built around that interest.
“We always benefit from this momentum demand," he said, "and they do create nice headline numbers. But what we really care about when we size a deal and decide how much we can tighten the price is still the feedback from tier one, real money accounts.”
One SSA syndicate head was even more cautious. “I always look at hedge funds with a pinch of salt,” he said.
“Yes, it’s good to see them in the books early and being helpful [to price discovery] but then we’ve also seen many episodes of the market when these guys are generally staying away from the market completely.”
“It feels very bullish right now and I can see why they want to be involved when there’s a very healthy performance of the new issues. I could be wrong, but I think their attitude will change when things do change.”
