Bond market risks dislocation as borrowing needs surge

Sovereigns still mostly access their domestic bond markets via regular auctions.

Governments are meeting more of their fundraising needs by raising debt not just through regular auctions, but also increasingly via the syndicated sales route of paying fees to investment banks to build an investor book. The latter approach used to be dominated by companies and banks, but this year sovereign-related borrowing in the euro zone and UK constitutes half of all new syndicated debt. There’s a risk that governments will crowd out companies needing access to the bond market

Total debt sales conducted in euros and sterling have risen 17 percent this year to a record €680 billion ($734 billion) in the first quarter, from €582 billion in the comparable period last year. All 10 of the largest euro-denominated syndicated deals this year came from government-related issuers, with Italy alone raising €30 billion this way. Greedy sovereigns might want to consider reverting back to their own lane of issuing debt predominantly via direct auctions.


While healthy investor demand has satisfied the needs of all three categories of issuer so far, government borrowing is set to head inexorably higher just when central banks have turned from being the biggest buyers in the market to disposing of their vast bond holdings accumulated via quantitative easing.

Sovereigns, supranationals and agencies, known as SSAs, can compete aggressively with highly liquid benchmarks often with a generous new issue premium above existing debt. Government bonds, whether sold via auction or syndication, are completely fungible. It’s attractive for investors buying via syndication as it juices their returns to beat their benchmark indexes.

Average euro investment-grade corporate yields of 3.2 percent may start to look skimpy compared with the 3.3 percent available, for example, on five-year Italian government securities if financial conditions worsen; the greater liquidity, tighter bid-offer spreads and bigger trading sizes available in sovereign debt could tip the balance against private-sector issuers.