The public sector bond market is constantly evolving. Its position as the largest segment of the wider debt capital markets means that it must and must always evolve. The year 2023 marked the return of liquidity in European government bond markets to pre-Covid-19 pandemic levels. This is, however, not the case for small issuers, because liquidity remains at the center of borrowers’ concerns, as we learned during the various meetings organized by the OMFIF Sovereign Debt Institute last year. last.
A number of other interesting developments will shape the discourse on the public sector bond market in 2024, such as plans by multilateral development banks to issue hybrid capital, the European Union’s path to sovereign status, efforts to make bond markets more efficient and negotiations on restructuring emerging market debt. Here’s a roundup of 10 themes to watch this year.
- Increasing liquidity must remain a key priority
Since obtaining liquidity for issuers is arguably the most important objective, besides profitability, increasing liquidity will always remain a priority. But innovative ways are being discussed to increase liquidity, which were also explored at the SDI meetings. This includes adding incentives from sovereign debt management offices, allocating a greater proportion to fast money accounts, overhauling the leverage ratio of banks and, most interestingly, the addition of non-banks as primary dealers. In a survey last year of participants at the European Forum of Sovereigns, Supranationals and SDI Agencies, 70% said that allowing non-banks to act as primary dealers was a good idea for increase market liquidity.
- Primary distribution mode under surveillance (again)
Pressures on the dealer principal are not new, but it is more important than ever to review and add incentives to keep this model sustainable. In SDI’s 2023 Public Sector Debt Outlook Survey, 45% of issuers worldwide said they were looking to offer more incentives to their brokers. This is particularly important for small banks which do not have the capacity to meet their obligations and compete with larger ones.
- Small issuers should look for ways to improve price discovery
The pricing process has become increasingly difficult for smaller public sector borrowers in 2023, with wide divergence in fair value calculations due to a lack of liquidity. This means that issuers will need to spend more time working with banks to find solutions to this problem, for example by increasing the use of outstanding lines withdrawal trades and issuing these trades directly into trading books and using benchmarks from liquid issuers such as EU and KfW.
- MDBs to issue first hybrid bonds via capital markets
There is increasing talk of multilateral development banks issuing hybrid debt to increase their lending capacity while protecting their triple A credit rating. The African Development Bank has been preparing for several months the first operation of this type in the debt markets. capital and attracts a lot of interest from investors. But the sticking point remains the transaction price. What is the fair price for a subordinated bond issued by a prime MDB? Expect BMDs to trade to a level that suits them and investors with the first transaction in 2024.
- Greenium could still shrink but is no longer a priority
“Greenium” – the premium obtained by issuers for selling green bonds – fell in 2023 and is expected to shrink further in 2024, reaching in some cases roughly the same levels as conventional bonds. EU green emissions will largely dictate greenium in the SSA market, given the amount it emits in this format. But the decline in greenium should not be too concerning given that it is no longer seen as a key priority for emitters.
- EU will take further steps towards sovereign status
The EU wants to be unanimously accepted as a “sovereign” borrower and it is continually progressing towards obtaining this status. Last year, the EU took several important steps, such as introducing listing commitments for its primary securities dealers to boost secondary market liquidity and placing them in the same haircut category as bonds of state. This year, the EU will take other measures, such as setting up a repo mechanism allowing its brokers to temporarily access EU securities in the event of a shortage. Meanwhile, plans for a futures market will intensify as liquidity continues to improve for EU bonds.
- Efforts to improve market infrastructure will accelerate…
Progress is expected in efforts to improve bond market efficiency, particularly in automation and standardization of documentation. Workflow processes were highlighted as the biggest inefficiency in the bond issuance process, according to SDI’s inaugural bond market infrastructure survey. At the same time, standardization of legal documents and order book processes was highlighted as the way to most improve the efficiency of pre-trade processes.
- …But digital bonds will continue to take a back seat
Despite this, digital bonds will not become widespread due to the lack of a common standard in technology and structure of these transactions. Additionally, market players are focusing on improving efficiency with current technology rather than new technologies. This is evident from the results of SDI’s Market Infrastructure Survey, in which only 29% of respondents said they were considering adopting distributed ledger technology and/or blockchain on the show. of debts.
- Will retail government bonds continue to play an important role?
Last year, retail bonds became an important tool in the financing programs of European public debt management offices. The issuance of these bonds made it possible to take advantage of the rise in yields driven by rising interest rates and the less attractive options offered to savers by banks. Belgium issued the largest retail government bond ever in Europe, with a transaction worth €21.9 billion over one year, before introducing other longer-term products. However, Belgium will reduce the amount it issues via retail this year, while a number of other DMOs remain unconvinced of the need for a specific retail bond strategy.
- Restructuring the debt of emerging countries will remain a complex matter
Debt restructuring is never an easy task and 2023 was no exception with the number of delays and setbacks in Zambia. The G20 framework has been frequently cited as the cause of the protracted negotiations which do not inspire hope in other emerging countries this year. There was, however, some positive news regarding debt-for-nature swaps, as Ecuador concluded the largest transaction of this type to date with a number of new features in the structure of this product.
Burhan Khadbai is the content manager for OMFIF’s Sovereign Debt Institute.
The public sector bond market is constantly evolving. Its position as the largest segment of the wider debt capital markets means that it must and must always evolve. The year 2023 marked the return of liquidity in European government bond markets to pre-Covid-19 pandemic levels. This is, however, not the case for small issuers, because liquidity remains at the center of borrowers’ concerns, as we learned during the various meetings organized by the OMFIF Sovereign Debt Institute last year. last.
A number of other interesting developments will shape the discourse on the public sector bond market in 2024, such as plans by multilateral development banks to issue hybrid capital, the European Union’s path to sovereign status, efforts to make bond markets more efficient and negotiations on restructuring emerging market debt. Here’s a roundup of 10 themes to watch this year.
- Increasing liquidity must remain a key priority
Since obtaining liquidity for issuers is arguably the most important objective, besides profitability, increasing liquidity will always remain a priority. But innovative ways are being discussed to increase liquidity, which were also explored at the SDI meetings. This includes adding incentives from sovereign debt management offices, allocating a greater proportion to fast money accounts, overhauling the leverage ratio of banks and, most interestingly, the addition of non-banks as primary dealers. In a survey last year of participants at the European Forum of Sovereigns, Supranationals and SDI Agencies, 70% said that allowing non-banks to act as primary dealers was a good idea for increase market liquidity.
- Primary distribution mode under surveillance (again)
Pressures on the dealer principal are not new, but it is more important than ever to review and add incentives to keep this model sustainable. In SDI’s 2023 Public Sector Debt Outlook Survey, 45% of issuers worldwide said they were looking to offer more incentives to their brokers. This is particularly important for small banks which do not have the capacity to meet their obligations and compete with larger ones.
- Small issuers should look for ways to improve price discovery
The pricing process has become increasingly difficult for smaller public sector borrowers in 2023, with wide divergence in fair value calculations due to a lack of liquidity. This means that issuers will need to spend more time working with banks to find solutions to this problem, for example by increasing the use of outstanding lines withdrawal trades and issuing these trades directly into trading books and using benchmarks from liquid issuers such as EU and KfW.
- MDBs to issue first hybrid bonds via capital markets
There is increasing talk of multilateral development banks issuing hybrid debt to increase their lending capacity while protecting their triple A credit rating. The African Development Bank has been preparing for several months the first operation of this type in the debt markets. capital and attracts a lot of interest from investors. But the sticking point remains the transaction price. What is the fair price for a subordinated bond issued by a prime MDB? Expect BMDs to trade to a level that suits them and investors with the first transaction in 2024.
- Greenium could still shrink but is no longer a priority
“Greenium” – the premium obtained by issuers for selling green bonds – fell in 2023 and is expected to shrink further in 2024, reaching in some cases roughly the same levels as conventional bonds. EU green emissions will largely dictate greenium in the SSA market, given the amount it emits in this format. But the decline in greenium should not be too concerning given that it is no longer seen as a key priority for emitters.
- EU will take further steps towards sovereign status
The EU wants to be unanimously accepted as a “sovereign” borrower and it is continually progressing towards obtaining this status. Last year, the EU took several important steps, such as introducing listing commitments for its primary securities dealers to boost secondary market liquidity and placing them in the same haircut category as bonds of state. This year, the EU will take other measures, such as setting up a repo mechanism allowing its brokers to temporarily access EU securities in the event of a shortage. Meanwhile, plans for a futures market will intensify as liquidity continues to improve for EU bonds.
- Efforts to improve market infrastructure will accelerate…
Progress is expected in efforts to improve bond market efficiency, particularly in automation and standardization of documentation. Workflow processes were highlighted as the biggest inefficiency in the bond issuance process, according to SDI’s inaugural bond market infrastructure survey. At the same time, standardization of legal documents and order book processes was highlighted as the way to most improve the efficiency of pre-trade processes.
- …But digital bonds will continue to take a back seat
Despite this, digital bonds will not become widespread due to the lack of a common standard in technology and structure of these transactions. Additionally, market players are focusing on improving efficiency with current technology rather than new technologies. This is evident from the results of SDI’s Market Infrastructure Survey, in which only 29% of respondents said they were considering adopting distributed ledger technology and/or blockchain on the show. of debts.
- Will retail government bonds continue to play an important role?
Last year, retail bonds became an important tool in the financing programs of European public debt management offices. The issuance of these bonds made it possible to take advantage of the rise in yields driven by rising interest rates and the less attractive options offered to savers by banks. Belgium issued the largest retail government bond ever in Europe, with a transaction worth €21.9 billion over one year, before introducing other longer-term products. However, Belgium will reduce the amount it issues via retail this year, while a number of other DMOs remain unconvinced of the need for a specific retail bond strategy.
- Restructuring the debt of emerging countries will remain a complex matter
Debt restructuring is never an easy task and 2023 was no exception with the number of delays and setbacks in Zambia. The G20 framework has been frequently cited as the cause of the protracted negotiations which do not inspire hope in other emerging countries this year. There was, however, some positive news regarding debt-for-nature swaps, as Ecuador concluded the largest transaction of this type to date with a number of new features in the structure of this product.
Burhan Khadbai is the content manager for OMFIF’s Sovereign Debt Institute.