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Photo: Reuters archive – |
This year, investors are breaking all records with large orders for the new government debt in the eurozone. Bankers say that the true scale of demand for bonds is becoming increasingly difficult to identify, writes FT.
Spain attracted orders worth more than 130 billion euros for a 10-year syndicated debt in January, the second record deal in 12 months. In February, an Italian issue of 10-year debt securities received orders worth 108 billion euros, breaking last summer’s record. Greece also attracted a crowd of buyers with the 30-year bonds it issued, the first with such a maturity after the financial crisis.
Excessive government debt orders have helped countries secure more favorable borrowing costs, but have also made it difficult to assess whether orders really reflect demand for bonds.
“Orders were seen as a reasonable measure of demand. Orders began to rise in 2017, but in 2020 they skyrocketed and reached downright ridiculous levels, “said Lynn Graham-Taylor, senior interest strategist at Rabobank.
Across the eurozone, the average supply-to-coverage ratio, a standard measure of government debt demand, will increase by about 40% in 2020 compared to the previous year and continue to rise this year, Rabobank reports.
Private sector demand is supported by the European Central Bank’s (ECB) comprehensive bond-buying program, which seeks to strengthen financial conditions and the economy weakened by the coronavirus shock. Since last March, the eurozone central bank’s emergency bond-buying program has absorbed more than 760 billion euros in public sector debt.
Purchases are made on the secondary market. This pushes debt-seeking investors to new issues to replenish their portfolios.
Part of the obvious interest in these transactions on the part of fund managers turns out to be fleeting. In both Italian and Spanish deals earlier this year, about half of the orders were canceled as government debt agencies sought lower interest rates. Several bankers say hedge fund orders are particularly sensitive to price changes, as they may seek to resell bonds quickly, with profits on the open market.
This forces bankers to confirm and reconfirm orders, to review them, which extends the duration of the transaction. The situation is also putting pressure on the managers of the next offers, who find it difficult to understand how buyers will react to the new prices.
Even if issuers tighten pricing, part of the demand remains very sensitive and will fall if prices tighten, said Ker Finlayson, head of the group of frequent borrowers at NatWest Markets.
European governments have raised an unprecedented 3.6 trillion. euro debt in 2020, according to the Financial Markets Association of Europe. Although auctions remain the dominant instrument for government loans, unions allow larger debts to be issued so as to finance their response to the coronary crisis.
The share of debt issued by a syndication increased last year. Meanwhile, auctioning faces constraints on banks’ capacity to act as market makers by holding bonds in their books until they can sell them to investors. This is driving more demand for syndicates from investors who want large chunks of debt.
When unions receive more orders than there are bonds available for sale, investors are allocated a percentage of the amount they are bidding on. Some investors are raising their orders to make sure they get at least close debt to what they’re looking for, bankers and analysts say.
“This behavior can lead to significant but potentially misleading data on procurement, and therefore should not be taken as an indicator of the level of demand,” wrote the head of the British debt agency, Sir Robert Steiman, in a letter to MPs in December.
Rising volatility in bond markets in recent weeks may make investors more cautious when bidding on large bond orders. Jean-Luc Lamarck, global syndication manager at Crédit Agricole CIB, says he does not expect immediate changes in investor behavior because, at least for now, there is still great confidence in the markets.
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