Relying on the euro market has proven an excellent strategy for SSAs so far this year. It has been stable, resilient and all but bottomless. But with the economic recovery from the pandemic reviving the long dormant spectre of inflation, the ECB’s “endless” support appears finally to be reaching a limit.
Even if this inflationary spell proves transient, it has gathered enough momentum to boost Bund yields to their highest level in more than two years, and fears of a hawkish ECB turn are unlikely to be easily dispelled. Add to this the launch of the European Commission’s €150bn-a-year Next Generation EU programme, and you have a cocktail that looks decidedly difficult to swallow.
The dollar market may prove a more fertile home, although this week’s $2.5bn disappointment from the World Bank shows that investors in that market are not prepared to give even top quality names an easy ride at exorbitant levels.
The solution, then, is versatility. Nimbly nipping between the core funding currencies is the best chance issuers have to ensure that they aren’t compelled to issue in an inhospitable currency.
It is issuers like the EU, which restricts itself to euro borrowing, and some of the large sovereigns and supranationals who maintain only a token presence in the dollar market, where the pain is likely to be felt.
It is surely only a matter of time before an issuer with a rigid programme runs into a bad window and rattles investors enough to shut the market down.
