With anticipation rife that the EU will enlarge its already gigantic borrowing programme next year, it and the rest of the SSA issuer base will have to work to integrate the lessons of a lively 2023 in the bond market. As other SSAs also look to ramp up issuance just as the European Central Bank accelerates quantitative tightening, there will be no let-up in the difficulty in unlocking the achievement of smooth completion of borrowing programmes.
Within a couple of years, the EU has grown to be one of largest bond issuers globally and established itself as a European benchmark borrower alongside some of the biggest sovereigns, such as France and Germany.
Arguably, it has even, to an extent, eclipsed other large issuers in terms of importance such as the European Investment Bank and KfW. Once, other issuers used to worry about clashing with those two in the primary market. Now, everybody worries about the EU juggernaut running over whichever issuer is in its path when it comes to market.
Some see the EU as a revolutionary force that will grow the importance of the SSA market; others view it as more of a disruption — an elephant in the room. But regardless of how it is perceived by peer issuers, dealers and investors, it is undoubtedly a force to be reckoned with.
It successfully brought to the market €80bn of NextGenerationEU supply in 2021 and has wrapped up two €120bn programmes since, navigating through one bumpy year after another. But through a variety of ways, SSAs and the EU have managed their supply of bonds into the market to allow room for everybody.
Meanwhile, the EU continues its campaign to be seen as a sovereign, or at least sovereign-style issuer — something it says will benefit the entire SSA market.
But a bigger test lies in store. The EU raised much less than it was expected to in the second half of 2023 but is expected return to what is considers as a more ‘normal’ level of issuance nest year. Some believe it could issue around €150bn, although in a further complication, no one will know what the EU's full-year requirement is until June because it splits its borrowing into two chunks each year.
As few of its bonds are anywhere near maturity, this is pretty much all net supply to the market.
And it is not the only source of net supply. The European Central Bank’s quantitative tightening programme will be in its first full year too as it clears out its balance sheet. The unwind of its Public Sector Purchase Programme (PSPP) will continue; meanwhile, the end to its Pandemic Emergency Purchase Programme (Pepp) reinvestments could come much earlier than expected; some banks are projecting the Pepp deadline to be brought forward to the end of March, nine months ahead of the current schedule.
A key lesson from 2023 was that issuers like Germany, KfW and a handful of sub-sovereigns and agencies proved that pricing on the same day as the EU but targeting a different part of the curve was a possibility. The EIB and KfW managed to price competing benchmarks on the same day as each other earlier in the year too, something they would previously have avoided.
It showed that demand for SSA bonds is robust. But however the EU approaches its syndications with a higher borrowing need in 2024 in the face of other supply pressures — bigger deals? More syndications? Both will take liquidity from the market — will have implications for other SSA borrowers
All that extra work that has gone into investor relations, communicating issuance plans and finding the right window over the last year or so has certainly paid off as the market is weaned off of central bank support. But who would have thought all of that was just a warm-up?