Many were expecting only a modest reopening for the sovereign, supranational and agency (SSA) bond market in 2023. So, a burst of investor appetite came as a pleasant surprise for issuers, who responded accordingly. Citi’s SSA team led the Europe, Middle East and Africa bookrunner rankings in the busiest January for some years.
Philip Brown, Citi’s SSA chairman, says that the factors dampening market expectations going into January had included stagflationary conditions and the ending of quantitative easing (QE). The increase in net supply to be placed with end-investors in an environment of rising rates would lead to higher yields and steeper curves.
“Central bank language on inflation had shifted from ‘transient’ to ‘persistent’,” Mr Brown notes. “This combination was expected to lead to a challenging environment for issuers.”
This was all in contrast to earlier boom times. “For years, it had been easy to fund,” recalls Alex Barnes, Citi’s head of SSA syndication. “There was plenty of demand and the power was with the issuers, who just had to pick a price.”
Coming into 2023, however, there were concerns that the demand was not there, Mr Barnes continues. “With widening spreads on the back of supply, would investors wait to see how demand played out? Issuers were concerned about how they would navigate their huge funding programmes.”
Strong start
The first quarter of the year is always crucial for SSA issuers, who like to front-load their annual funding. “It’s important for the early deals to go well, because they set the underlying sentiment in the market,” Mr Brown observes, adding that the first large benchmark syndications are the trophy mandates to win.
The first issuer out of the 2023 gate was the European Investment Bank (EIB), which announced a new five-year, US dollar benchmark deal on January 3, the first fully working day of the year (London was closed on January 2 for a bank holiday). Joint lead managers were Citi, Barclays and TD Securities.
In a world where predictability of supply is a virtue, it has become the established norm that the EIB opens the US dollar market. “Every other SSA dollar issuer waits to see how their deal goes,” Mr Brown says. The deal was announced with initial price thoughts of secured overnight financing rate mid-swaps plus 41 basis points (bps) area.
By the next morning, indications of interest were more than $11bn, matching the highest-ever interest level for an EIB US dollar global deal. Books opened with the spread set at mid-swaps plus 39bps and, with orders of more than $15bn from 170 investors, the size was set at $5bn.
we had assumed that book sizes would be smaller than in previous Januaries, as they were in the second half of last year
“In the run up to the opening, we had assumed that book sizes would be smaller than in previous Januaries, as they were in the second half of last year,” notes Ebba Wexler, Citi’s head of SSA debt capital markets. Given widening spreads and the miserable year endured by bond investors in 2022, that was a reasonable assumption. Would they demand generous concessions in order to come back into the market?
“The EIB US dollar transaction went extremely well and showed an impressive depth of investor demand,” Mr Brown says. One of the more helpful post-announcement developments was the publication of lower-than-expected German inflation figures. “It was the first of a series of European inflation numbers to come in below expectations, triggering short covering and a strong bond market rally,” he adds.
The EIB’s success served as a green light for other issuers. Yet, as January proceeded and more of them came to market, it became clear that differences of only 1–2bps in yield could mean the difference between triumph and failure. “One or two new issues had concessions that were a little skinny and the results were not good,” explains Mr Brown.
Citi was also awarded a mandate for the EIB’s second transaction of the year, a benchmark 10-year euro-area reference note deal, alongside Goldman Sachs, Natixis and Société Générale. Initial price guidance was mid-swaps plus eight bps.
With the final spread set at six bps, the deal was sized at €5bn, based on 220 orders worth €22.5bn. The EIB had earlier announced that its 2023 funding programme would be €45bn so, together, these two transactions accounted for around 22% of the total.
Global issuance
Other notable new year SSA deals where Citi acted as joint lead manager included a $5.5bn dual tranche issue for the Asian Development Bank — $3.5bn in three-year paper and $2bn in 10-year. Spreads were set at mid-swaps plus 29bps on orders of over $8.5bn on the three-year and plus 90bps on orders of $4.9bn on the 10-year paper.
Citi also acted on the debut bond transaction of the OPEC Fund for International Development, alongside Crédit Agricole, Goldman Sachs, Nomura and TD Securities. This followed an extensive marketing exercise which started in March 2022. The fund issued a $1bn three-year Reg S/144A sustainable bond, priced at mid-swaps plus 90bps. Proceeds will finance eligible Sustainable Development Goals (SDG) loans, as defined in the fund’s SDG framework.
In addition, Citi was joint lead manager and duration manager on Italy’s new €7bn 20-year bond, its first government bond (BTP) syndication of 2023. Order books closed above €26.5bn, with the spread tightening from guidance to 12bps over the 1.8% March 2041 BTP.
The country needed a current coupon bond (with a coupon roughly equal to its yield to maturity) and it chose the 20-year to fit the bill. “Italy’s yield curve was inverted between the 20- and the 30-year on recessionary expectations,” Mr Brown says. “The 20-year was the high yield point on the curve.”
The BTP market rallied from the announcement onwards, outperforming bunds throughout the deal’s execution. “Investors had positioned themselves short going into 2023, but now the market was rallying away from them,” he says.
Fear of missing out on peaking yields was the driving theme of the new-year rally. “Every fixed income investor is waiting for the [central bank] pivot,” Mr Brown maintains. “When recession becomes more important than inflation in central bank decisions, we’ll see a bull market in bonds and those who spotted the peak in yields will have done very well.”
Citi was a lead on Spain’s new €13bn 10-year bonos. With guidance of 12bps over a comparable Spanish government bond, the order book took less than two hours to top €70bn. After the spread was set at 10bps, orders continued to grow to more than €86bn, the country’s second largest-ever orderbook.
The volume of orders allowed Spain to print a €13bn deal, instead of its usual €10bn January transaction. It illustrated the fine elasticity of demand in the rates market. “If price guidance had been 1bps or 2bps tighter, there would probably have been no deal,” Mr Brown reckons.
Public sector deals
The bank believes that the end of QE has played to its strengths — it was easy to be a market-maker when the European Central Bank was buying so many bonds. “Now issuers need to find end-investors across the globe and are looking for a safe pair of hands to run their deals,” Mr Barnes says.
Citi has been present on a lot of French public sector deals in 2023, reflecting the post-Brexit build-out of its franchise in Paris. They included a €5bn social bond for Caisse d’Amortissement de la Dette Sociale, a €1bn transaction for the Council of Europe, a €1.5bn sustainable bond for Agence Française de Développement and a €750m deal for Agence France Locale.
One of the features of the new year has been the breadth of issuer type, according to Ms Wexler. She points to the Japan Bank for International Cooperation, Japanese bank OKB and the OPEC Fund for International Development, all names for whom Citi led January benchmark US dollar deals.
“At the back end of 2022, you could assume a market was there for regular names, but there was no visibility around outcomes across the whole market,” Ms Wexler says. “This year, well-priced transactions have been extremely well received.”
Given the size of government debt that needs to be funded, the supply of new SSA paper is expected to be very large this year. Early indications are that investors are receptive, if the price is right. “Investors have cash which they need to put to work,” says Mr Barnes. “They are waiting for the pivot, when rates hikes turn to cuts. In the meantime, they want to be a part of deals that are working well.”
