The sovereign market faced two main challenges this year: a growth in its own capacity to raise ever larger amounts of debt, and the additional competition posed by the government guaranteed bank sector. The participants at this year's IFR Sovereign Roundtable were generally in agreement that neither of these had significantly changed how national debt offices go about their everyday role of financing their budget deficits.
The means by which financings have been achieved have, nevertheless, had to respond with a degree of innovation to ensure investor appetite remained sufficient during this testing period. The divergence between some sovereign spreads within Europe earlier in the year presented savvy investors with an unprecedented opportunity, albeit one made more obvious by hindsight. The notion that there was a high probability of a Eurozone breakdown has now been reversed. Although it is not business as usual, most participants agreed the market has returned to much more stable conditions.
Business with customers has led the way back from the depths of the market's disruption, although business to business activity is taking longer to resurrect. The role of electronic platform trading is still considered integral to turnover, but the rebuilding of bank balance sheets has further to go before pre-crisis levels of activity can be restored.
While the spread differentials within Europe have significantly improved, the well-being of the patient is better assessed by comparison with its neighbours. Although there have been successful fund raising operations carried out by some central European and Balkan states, the use of emergency funding measures provided by the European Community and the IMF may present more cost effective financing for some countries.
For most, however, the worst appears to have past. By embracing different methods of selling debt, investors’ reach has also been extended. Some countries have turned to syndication to minimise the market disruption surrounding government bond auctions earlier this year. For others a more flexible approach to setting the size of auctions has contributed to more successful pricing outcomes. Sovereigns are spending more time monitoring the performance of the banks responsible for the distribution of debt as a central pillar of their issuance strategies.
Fears remain that the recent improvement in market conditions may be transitory or that economic recovery will put yields under pressure. This could potentially lead to even greater pressure on the refinancing needs of the sovereigns and has already led to an increased appetite for inflation-protected debt. Several participants expressed concerns about this scenario while accepting that, for now, the fixed income market is likely to be supported by a lower equity risk profile. That will itself contribute to the normalisation of fixed income market conditions.
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