Sovereign bond issuers are concerned that demand for new issues in 2024 will fall primarily due to central banks reducing their buying – although hedge funds are likely to play a larger role.
Despite a “solid start” to the funding year, public sector borrowers are concerned for the second half of the year, according to research.
Pension funds and insurance companies are expected to increase demand, but central banks and official institutions are expected to offset this, according to the Official Monetary and Financial Institutions Forum (OMFIF), a ‘think tank’ for central banking, economic policy, and public investment,
OMFIF surveyed 39 senior borrowing officials from 34 sovereign, supranational and agency issuers in developed and emerging markets and found many felt the macroeconomic environment could affect the funding outlook.
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Reduced demand was among the biggest concerns, with just under 90% of respondents highlighting reduced demand from investors as one of the top three funding concerns for borrowers in 2024.
Some 20% selected it as their biggest concern with uncertainty on rates and geopolitics as the cause.
The biggest net decrease is expected by issuers in Asia-Pacific and the Middle East, according to the research.
Generally, a net increase across all major investor types – such as pension and insurance funds, hedge funds, asset managers and bank treasuries – is expected.
Hedge funds are predicted to play a more active role, OMFIF said. The research found around two thirds of issuers expect non-banks to be more prominent in either primary or secondary markets in 2024 and a quarter of issuers said non-banks will play a more active role in both primary and secondary markets.
The survey also found that new issue premiums – the difference between the bond yield when first issued and the subsequent yield in the secondary market – are expected to be bigger in 2024 than in 2023, although most respondents said this would only be marginally higher.
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ESG issuance remains important despite no “greenium”. Half of the respondents stated issuance in this format will form up to 10% of their annual funding programme, while a quarter expect ESG issuance to form over 20% of their borrowing in 2024 – a higher proportion than in 2023.
The so-called ‘greenium’ has, however, become “non-existent”, according to the ‘OMFIF’s Public sector debt outlook survey 2024’, with 43% stating there is no greenium for ESG issuance and 40% stating it is only marginal (between 0-5bp and a maximum of 2bp in most cases).
