While still front and centre of bond market participants’ thinking, issuers and investors alike have adjusted to the new realities created by the Eurosystem’s public sector purchase programme and have shown their customary ability to carry on with business, if not as usual, then within the constraints of the new regime.
It was not an entirely seamless process, and subsequent tweaks to the initiative – with more set to come – have certainly kept people on their toes, although the greatest hurdles appear to have been overcome.
And while pretty much every asset class across the debt capital markets came under some sort of pressure over the past year, the sovereign, supranational, agency and regional sector, while far from entirely immune for obvious reasons, continued to function and provide issuers with funding and investors with assets.
From a eurozone sovereign perspective, where some banks had started reflecting on the merits of their primary dealership commitments, the syndicated market proved a boon in terms of size, demand and available tenors.
The first couple of months of 2016 threw up examples of this, such as Italy’s €9bn 30-year that attracted orders of €26.5bn, Spain’s €9bn 10-year that came on the back of €29bn demand and Belgium’s €5bn long 10-year that boasted a €13.75bn book – its biggest in years. For its part, Portugal sold €4bn of paper against more than €12bn of demand – its largest deal for at long time – in a move that looked prudent given the subsequent spike in its yields.
What these issues had in common was that they were conservatively priced. And this proved to be key to ensuring success in an environment where the spectre of a single buyer able to take large percentages of eligible transactions in the form of the ECB had the effect of distorting market levels.
The supranational and agency sectors had to come to terms with this early on in the process, with secondary spreads becoming so tight that the primary issues priced off the back of them were at levels that saw real money investors step away from the market.
But here again, things eventually righted themselves and an equilibrium was found.
And all the time, there was the prospect of venturing across the Atlantic, where the US dollar market, while not always the most popular choice with European issuers for large parts of the year, offered the prospect of sizeable trades.
Diversification was also available through other routes, such as in Australasia, where the Kangaroo market still offered opportunities, albeit not in the same way as a few years ago. On the other hand, across the Tasman Sea, New Zealand’s Kauri sector posted record volumes in 2014 and 2015 and looks set to do the same in 2016. While not massive in size terms in the greater scheme of things, these markets open up ways of spreading the load.
From an investor point of view – and not to everyone’s taste – there will also be diversification opportunities as China’s municipal bond market looks set to take off.
In the meantime, the more traditional SSAR market will continue to adapt and evolve, taking into account the various circumstances that arise and eventually finding a way to carry on regardless.
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