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Sovereign, supranational and agency issuershave long had a habit of concentrating their borrowing in the first half of the year. But that trend seems to have accelerated in2011, with many of the larger SSA issuers having completed up to 40% of their annual borrowing targets by the end of the first quarter alone.
One major reason for this was the concern that any window of opportunity that presented itself needed to be seized with both hands. Following a period when financial markets have lurched from one crisis to the next, and with all eyes on the peripheral European states that many believe are likely to be the source of the next big drama, borrowers did not want to waste any benign issuance environment.
Issuers were also eager to capitalise on the persistent low interest rate environment that logic dictates must at some point end. The ECB has already commenced its rate-raising cycle, which may detract from the attraction of fixed income markets relative to other asset classes. At the beginning of May, 10-year Bunds reached yield parity with US Treasuries in part as a result of the differing interest rate outlooks in the regions and compared to a spread of minus 70bp a year ago . The benchmark spread had not traded through parity since 2009 when it briefly spiked into marginally positive territory in early October, prior to which the last time was in June 2009.
The US has also signalled an end to quantitative easing, which is the first step towards eventual rises – although that process could yet take some time. Until the curtain finally falls on the process that has driven the global financial agenda since its inception in late 2008, and in conjunction with the favourable cross market swap arbitrage, US dollar debt is likely to retain its edge over euro and sterling funding. The prevalence of the US dollar has been pronounced in recent months. Even Central and Eastern European borrowers, whose natural inclination should be towards euros, have overwhelmingly gravitated to the Greenback.
The market’s concerns about the possibility of contagion have also abated somewhat. In the latter half of 2010, with the problems of Greece laid bare and the finances of Ireland and Portugal deteriorating fast, many worried other countries could be pulled into the quagmire.
Since then, a new sense of perspective has emerged that has given credence to the view that the so-called PIG countries are in a unique situation. Spain always looked to be the county in the greatest danger of being sucked into the mess but its performance so far has spread calm among investors. Nervousness about the impact of the European Financial Stability Facility and the European Union have been allayed by the confidence that its mandate will be contained to the resolution of those three countries alone.
The return of calm among SSA investors, which have rarely experienced the kind of excitement to which they have been subjected in the last 18 months, has enabled the Spanish government-guaranteed agencies such as FADE, FROB and ICO to access the market with relative ease. Nor do most in the market envisage any problems for the new German SSA issuers, such as FMS-W and EAA.