Roundtable: Lessons of 2023 to guide SSAs through hectic market to come

Anu Sammallahti, Finland: Our issuance in 2024 is expected to follow a similar pattern to the previous year. Usually, we complete 50%-70% of our long-term funding in the first half of the year.

Silke Weiss, European Stability Mechanism: The ESM and the European Financial Stability Facility’s (EFSF) funding plans for 2023 were €28bn — €8bn for the ESM and €20bn for the EFSF.

We often finish our programmes by October. However, in 2023 for the ESM we finished in September with a $3bn three year and the EFSF completed its funding programme at the beginning of October with a dual tranche of a new five year and a tap of an outstanding 2034 bond.

We are in the process of getting the 2024 funding plans approved. You can expect similar numbers to what is published in our investor presentation currently and we will keep a similar issuance pattern. Generally, our issuance activity is influenced by market conditions, investor appetite, and our own liquidity needs.

Koen Westdijk, BNG: It is not our intention to be one of the first, but there were windows that we saw at particular moments.

In the first quarter of 2023 we did 40% of our funding and had roughly 70% done by June 30 — a little bit more than usual.

Normally we raise 60% in the first half of the year and 40% in the second. We do not intentionally front-load but we would like to make a good start. In 2024 it will probably be the same — say, 60% will be done in the first half. If there’s a window, we try to take it.

Andrea Dore, World Bank: Being midway through our funding year in January is helpful — there is less pressure to try to be out at the start of the year.

That said, there tends to be a lot more liquidity at the start of the year and some official institutions decide their asset allocations in January. It makes sense to try to capture some of that flow.

In 2023, there was a lot more supply in February than in January, especially in dollars. There were some very large trades executed. It may have been an abnormal year.

We will be looking very closely to see if we will take advantage of the January window. This will be driven by market conditions and investor appetite, though.

As of mid-November, we had funded 40% of our programme. By the end of the calendar year, we hope to have about 50% of our funding done.

We are a multi-currency issuer. In January 2023 we tapped the Australian market, the Canadian market, euros and multiple other currencies. We can look across markets to find the right window, and we will do again in 2024.

We don’t know what will happen in January, so we will be ready to react quickly.

Jörg Graupner, KfW: Every year, we aim to have raised around two-thirds of our funding target just before the summer break.

The ECB stopping reinvestments under its Asset Purchase Programme (APP) influenced our activities in terms of our currency mix, but not volume. We were more active in euros in the first half of 2023 instead of issuing in other currencies like dollars or sterling. But we had still raised two-thirds of our programme by the summer break, exactly as in recent years.

Andreas Becker, Land NRW: We front-loaded more in 2023 than before. We had to fund about €11.5bn for our core budget and more than €2bn for a special fund to cover the consequences of the energy crisis and the Russia/Ukraine war.

Out of this €14bn, we did €9bn in the first quarter of 2023 — and by mid-year, our core budget funding was more or less complete.

After a market absence of five months, we used a window in October to fund the first €1bn for our special fund and we raised the remaining needs of €1.45bn in November.

If we had had clarity on the amount needed for the special fund earlier in 2023, we would have done it in the first half, too. We had a firm belief that issuance levels would not develop in our favour as the year progressed, given expected increases to central bank interest rates and the burgeoning uncertainty in the markets.

We have a different view about 2024. I’m quite sure that inflation will stay near to but above 3% in the coming year, especially due to rising wages and a backlash in energy prices. In my view, the market is a little bit too optimistic regarding the figures on screens we see at the moment. Therefore, I expect just one ECB rate cut in the fourth quarter of 2024. For this reason, interest rates will move sideways in the first months of the year, with a tendency to decline thereafter.

Taking the market perception and conditions as well as the maturity profile of expiring Land NRW bonds into account, our capital market exposure in 2024 will be more pro rata temporis, and so we will share it throughout the year. We won’t front-load so much.

Patrick Seifert, LBBW: Generally speaking, most issuers have been well advised to front-load. I just revisited the roundtable we did in 2022 and it was pretty much the same conclusion back then.

There might be a structural element to that, given we are in a post-quantitative easing world. And there may also be additional complexity from geopolitics, meaning that there is no reason for an issuer to wait — because you can never exclude markets turning more challenging later in the year.

Front-loading has paid off well and most likely should continue to do so unless there are very particular reasons that are part of the issuer’s mandate.

There could be two elements, however, that make 2024 different. One is fresh money and performance coming into fixed income. The second is the expectation that inflation will return to normal, which could motivate investors to return to the longer end of the market. That would give more room for the supply to be spread nicely across the curve and across currencies.

Westdijk, BNG: We are a stable institution; it will be roughly €16bn-€18bn again but probably at the higher end of the range. We will try to increase the portion of ESG-labelled issuance, in line with our strategy. In 2023 it accounted for around 40% of our issuance. We intend to increase that in 2024.

Engelen, EU: We will communicate our target for the first half of 2024 in December and it will only be part of what to expect in the calendar year 2024.

We had this delay in the implementation, particularly of Next Generation EU funding, due to the revision of national recovery and resilience plans related to the introduction of Repower EU — a programme to strengthen our autonomy from Russian fossil fuels, which needs to be woven into these plans. This exercise is now complete and we should catch up in 2024 with the delayed rollout of Next Generation EU. That should lead to higher disbursements and higher borrowing.

Stix, Austria: Our funding outlook will be published on December 14. However, given redemptions and budgetary dynamics, a similar range as in the past years can be expected.

Sammallahti, Finland: We foresee a broadly similar funding requirement to that of 2023.

Weiss, ESM: We will communicate in December in our quarterly newsletter our annual funding needs for 2024. It will be around the same level as 2023. As we have no active programmes and our last disbursement to a member state was in 2018, our funding programme is solely to refinance the existing debt. With only rollovers to fund, we have a clear picture of our funding programme for years to come, assuming no further programmes or assistance are required.

Dore, World Bank: You are seven months early and we are still working on getting this year’s funding programme done. We also have the International Development Association funding programme as well, of which we have raised 40%-50%.

There is no reason to believe that next year’s programme will be lower than this year. There is a lot of energy behind the World Bank to expand, to do more to help the world tackle many crises. Our new president is supporting the desire to increase our balance sheet capacity so that we can do more — whether that is through issuing hybrid capital or benefiting from guarantees, it will have implications for our funding, but over time. But this will not noticeably impact our overall funding volume initially.

Next year, our funding programme size will be at least similar to this year. That means something in the range of $50bn for IBRD, the International Bank for Reconstruction and Development — known as World Bank in the capital markets — and at least $10bn for IDA, the International Development Association.

Graupner, KfW: We will announce our 2024 funding need on December 7. We have been getting the numbers from our lending departments and working on assumptions about what loans may be repaid early. We will also look at our redemption profile. Net supply will again be very limited.

Becker, Land NRW: In contrast to what Jörg said, for Land NRW it’s quite clear. We are not expected to be in a financial emergency situation in the coming year, so we have to balance our budget without new debt.

We have €13bn of maturities in 2024. Of these, €3bn will not be refinanced because they will be repaid from the coronavirus special fund, giving a funding requirement of around €10bn.

We will distribute this issuance throughout the year. With a view to liquidity management and due to the structure of maturities, I am currently planning to issue €2bn in the first quarter plus a sustainability bond, and maybe another €1bn in the second quarter. The rest will be done after the summer.

Seifert, LBBW: If you break it down into agencies, with a very strict and clear mandate, the expectation is probably that issuance is going to be broadly in line with this year — maybe slightly to the higher end of things. The real unknown is what governments will be doing, what their political priorities will be and how this will relate to EGB issuance.

There is no lack of ideas on what individual governments should be doing economically. You can argue that governments in Europe, for example, need to reassume certain responsibilities that were privatised over the last couple of years — energy or defence, for example.

It is also a question of how willing governments are to review fiscal revenues. Having to invest does not always mean needing to borrow. Just look at the controversy around the German state budget. You can raise tax and cut expenses: unpopular but, to some extent, it might be also inevitable. On balance, we expect SSA volumes to go higher but they will not skyrocket.

Sammallahti, Finland: Euros is and remains the main currency. Dollar issuance is possible in T-bills. Issuing a long-term dollar benchmark would be subject to funding cost efficiency. No issuance in currencies other than euros or dollars has taken place in recent years.

Westdijk, BNG: It’s important to maintain our euro and dollar benchmark curves. I expect to issue several benchmarks in those two currencies next year.

I would love to do a 10 year dollar deal but the economics have to make sense because we have to swap everything back to euros.

We did two Swiss franc benchmarks in 2023 and the year before a Canadian dollar benchmark — something that we are looking to do again. We are also active in the Aussie dollar market because we need duration. So, no changes compared with this year.

Dore, World Bank: We issue, generally, in 20 to 30 currencies. Last year was at the low end and that was still about 20 currencies. We need to diversify; we can’t just rely on the dollar market.

Dollars represent the highest percentage of our funding at 65% now but in some years in the past, it was as high as 90%. Our diversification across currencies is increasing.

The euro is becoming a much bigger currency for us, at around 15% of our funding programme. We are hoping to increase that.

For IDA, 70% is in euros because IDA is very focused on longer duration, and the euro market is where we could get that depth.

We are also seeing an uptick in issuance in emerging market currencies.

We had seen a lot less EM issuance since the pandemic and the subsequent increase in volatility. But there have been structural changes in some currency markets. They range from changes to withholding tax, to the inclusion in global indices. These changes have increased demand for some EM currencies.

Our focus will continue to be issuing bonds in G10 currencies. While we would like to issue more bonds in currencies such as yen, that remains an exception since we haven’t been able to do much, given the cost of funding compared with other markets.

We are also exploring new products. We have been doing some work to resume offering bonds to retail investors in Italy. With rates having been low the last few years, demand for retail was suppressed because yields were unattractive. With yields much higher, this has changed. You can see that in a lot of retail placements, even by governments — such as the record retail transactions in Belgium, Italy and Portugal. There is significant demand from retail investors.

We had been very active in the retail market in the past, but not recently. So, it was good for us to be able to price this first retail transaction in Italy, after several years. We have a preference for duration, but we are going to take a barbell approach. There are some markets where we just cannot get duration but will still want to be present — Canadian dollars and sterling, for instance.

Stix, Austria: In the medium- and long-term segments we have a focus on euro issuance, primarily via RAGBs. We have not used our EMTN programme for foreign currency issues in 2023 as this is subject to having a cost advantage versus euro funding after hedging costs.

In the short term, we use our commercial paper programme for foreign currency issuance, depending on investor demand — in 2023, we issued commercial paper in foreign currency, mainly dollars and sterling. We will continue to do so in 2024.

Apart from the currency mix, we are working on the implementation of a new investment product for retail investors to broaden our funding portfolio.

Engelen, EU: I’ll keep it very short. We issue solely in euros.

Graupner, KfW: Our funding approach is very simple and proven. We take a flexible approach, meaning we don’t announce calendars, send requests for proposals, or have any fixed mix of currencies. We have two targets: the total funding needs and the duration needs. And we have to consider, that our loan business is mainly contracted in euros.

I would expect for 2024 a broader mix of currencies, especially when I look to the comparison between euros and dollars; we were more active in dollars in the second half of 2023 than the first. We are more active in the dollar market because the support from central banks in euros is less of a given.

It’s much more difficult to predict the volume in other currencies. I have just come back from Switzerland; I can say that we might also re-enter the Swiss market soon. Pricing is more attractive again.

In those currencies we want to achieve better funding levels than in euros or dollars and broaden our investor base.

Becker, Land NRW: The euro is our most important currency and our primary target market. Like KfW, we are also active in many other currencies. In 2022, for example, we were among the top five issuers in the Norwegian market. In total, we have issued bonds in 17 different currencies over the years.

However, for us, foreign currency markets are purely opportunistic. We only issue these bonds if we can achieve the same level as issuing in euros after swap costs. That prerequisite meant that we were, unfortunately, not in the situation to issue a single foreign currency bond in 2023.

There were phases in 2023 when the dollar market was more receptive than euro market, albeit at slightly worse prices. With that in mind, it is perhaps worth considering the dollar market as more of a strategic than an opportunistic currency, especially in the maturities up to five years. But we have to discuss that internally first before we go ahead.

For this Swiss market, we see it the same way as KfW. We are shortly to enter again and have just prepared the docs. We are just waiting for the market.

Weiss, ESM: Our funding mix in 2023 had benchmark maturities from three years up to 15 years for EFSF and for the ESM we issued from three to 10 years. The ESM returned to the dollar market with its first three year benchmark issuance, after not issuing in the currency in 2022.

In addition, the ESM will continue to issue bills through auctions in three and six month maturities.

Seifert, LBBW: Diversification of currencies is a strategic issue. You can use it opportunistically once you have made that strategic choice but it needs to fit the overall corporate strategy.

That explains why the European Commission works the way it does and why the World Bank, KfW and BNG have found other currencies a valuable addition to their funding toolbox. What is relevant for investors is that it helps to manage supply. You want to target different pockets of demand but you want to make sure you communicate in the most transparent manner to the market. That is the secret to placing considerable volume throughout 2024, including coming late in the year, such as the EU’s transaction in November, which was extremely well received.

Dore, World Bank: We realise that some investors are just not going to buy in dollars. We want to provide products for them. As a big issuer, we must diversify funding sources. It’s a risk to be completely reliant on one market, especially when trying to raise funds at a sustainable level at the lowest possible cost.

Seifert, LBBW: One addition to that: if you issue ESG bonds, the euro market is the place to be — there is so much diversification you can do. As a committed ESG issuer, you want to serve the euro market in sufficient scope.

Graupner, KfW: Finding the right balance between the needs of investors and the issuer.

To do that, we are getting closer to investors, the secondary market, and, of course, we always keep a very close dialogue with our dealer banks.

We have intensified the dialogue with key investors. We have also been in close dialogue with banks’ trading desks to get a picture of the secondary market. We are closer to the flows there to give us a broader picture of where demand is.

Becker, Land NRW: Clear and reliable communication to the market will be crucial in 2024. We must communicate with investors and the banks to find the right price. Overall, it’s an open, clear and fair communication.

Otherwise, you are playing whack-a-mole, picking trades here and there. You have to combine all the mentioned key factors to make a good and reliable package; in the long run the market rewards this.

Weiss, ESM: Actually, all of these points matter and it is not possible to prioritise one over another. Instead, it is a fine balancing act.

To pick the right window you need to be able to navigate busy markets and data announcements.

To issue at a fair price we need to pay attention to price discovery to ensure that we attract investors while trying to keep funding costs low for our borrowing countries.

Finally, the era of jumbo order books seems to be over but you still need to comfortably cover your targeted amount to give a signal of confidence to market participants and to be able to return.

Stix, Austria: It is important to follow a holistic approach. All these points are relevant but having a clear issuance window, while at the same time getting the tenor choice right, is very important, as the market has changed with the step-out of the Eurosystem as the largest buyer.

Apart from that, it is beneficial to have a broad set of issuance formats and instruments in place, which is true for the Republic of Austria. Our bond issuance is evenly split between new issue syndications, auctions and bilateral taps of outstanding bonds, while our comprehensive green programme as an important second funding pillar allows for further flexibility in our issuance strategy.

Sammallahti, Finland: Picking the right window will be key, as it supports achieving the best outcomes for both pricing and investor distribution.

Engelen, EU: We are one of the largest, if not the largest, net supplier of issuance to the euro market. Making sure that we have a resilient market is itself an objective.

But if you asked me what our specific wish is for 2024, it is to listen to investors, to build our curve further and to keep it liquid across all lines. We promote the liquidity in our securities. This is based first and foremost on well-balanced, regular issuance in all the benchmark maturities, in sufficient volume and frequency.

We will have the volume and the regularity of presence to achieve that. It’s important, given our young age as a wholesale issuer, to build further the secondary market liquidity in our bonds.

Dore, World Bank: Sustainability is key for us; it’s about consistency. For that, we need to be in touch with our investors and understand their needs. Portfolio managers change, so it is important that they know the World Bank. We do not take it for granted that they do. We do the homework. We stay in touch with investors. We provide the needed information.

Patrick mentioned that European investors are very focused on ESG; we are doing a lot of work there, making sure that investors understand the positive impact of their investment, and the global importance of it.

Duration will continue to be a focus for us as well. We need to ensure that we increase duration to reduce refinancing risk because we are a counter-cyclical institution that will have to be able to ramp up when things are not going well.

Another priority is to continue to expand the investor base for IDA. It is still young. It was just starting to crawl and during the pandemic, it had to stand up and run, going from a funding programme of just over $1bn to $10bn suddenly.

We have been able to build a full yield curve for IDA in the euro market with bonds from five years all the way to 30 years.

IDA has issued bonds in five markets so far — US dollars, euros, sterling, Norwegian kroner and Swedish kronor. The goal for IDA is to expand into other new markets.

Westdijk, BNG: The most important thing for us is to be a stable issuer, so that investors know what to expect. We have been there since 1914 and we are planning to be there for another 110 years — but you need a stable relationship with your investors to do that.

Our priority is our customers; we have to get the very best prices for them — but for that, investors also have to come back to us.

If you are a stable issuer, investors can anticipate what you will do.

Seifert, LBBW: We are just concluding our 2024 investor survey. One of the outcomes of that has been that, in picking their investments, 74% of them look at credit rating first. So, particularly for the audience here, you have many more options for placing your funding needs in the market.

Picking the right issuance window is important. Geopolitical concerns will be a constant for the next couple of years, which means we may have days that are less suitable for transactions than others.

But in being top rated issuers, SSAs can offer a haven to investors.

If you can use your flexibility to pick the right window, please do. You will have good order books and strike a good price.

Overall, it’s about managing the expectations and being transparent about your needs. Any trade is only as good as the expectation around supply for the rest of the year.

Westdijk, BNG: The Dutch are blunt, so I can be honest: the EU is a force to be reckoned with. It’s a competitor and a colleague, just like KFW, which we also must manoeuvre around.

When we talk to investors, they make a lot of reference to the EU and they compare the two of us.

In 2024 there will more than €500bn of EU bonds outstanding. We cope with it — so far, so good. I’m eager to hear Christian’s view.

Stix, Austria: We have followed the market very closely throughout 2023 and have also been in regular exchange with our primary dealers concerning market development, suitable issuance windows and pipelines. We have seen that making the right choice of issuance windows is not an easy task. For example, economic or inflation data has had a far greater impact on the market and investor sentiment than in the past.

But overall our three successful new issue syndications in 2023 showed that we have been pretty successful on this front. So, we are not planning to change our approach.

Dore, World Bank: It’s an interesting one and I am keen to hear Christian’s view as well.

The positive is that there is a lot of depth in the market. One might have questioned whether the market could absorb a new issuer of that magnitude, but it has.

In the past, we thought that a lot of the trades had to be sequential. In the past year or so we have not had that choice because there were fewer issuance windows and trades have been successful. There is depth in the market and it’s noticeable to everybody.

Becker, Land NRW: It hasn’t been a problem for us so far. The EU’s persistent presence in the capital markets has not had a negative impact on our activities this year because we finished our main programme so early in the year.

Having a big issuer like the EU permanently in the market shrinks the windows for us and other participants. We all could see that the EU was able to generate demand of more than €130bn for its latest issue in November this year. Therefore, you have to create a sophisticated plan to navigate around it and to avoid hitting the market in the same window.

Graupner, KfW: It helps that EU circulates an RFP in that way, that the market is very well sounded out about what the EU potentially should or could do. This year we were active on the primary market at the same time as the EU and were able to generate very good demand for our transaction.

But overall, timing is getting more and more important. There are known and some unknown events that could disrupt issuance plans. We know other borrowers’ issuance plans, for example, and when central bank meetings, data releases and bank holidays would take place.

There are also numerous events that we would not know about in advance. How do we approach the challenge? It’s again about being flexible. The KfW team is permanently in dialogue with market participants and will be ready to use issuance windows as we spot them.

Fortunately, the KfW name is well known worldwide, and thanks to this we benefit from being able to have a short marketing period when entering the market.

Sammallahti, Finland: No change is foreseen in our approach. Large issuers usually flag their windows well in advance. General market appetite for rate products will be at least as important as sequencing of supply.

Weiss, ESM: With challenging markets and a large amount of bond supply, being nimble and adaptive to market conditions has been crucial for successful transactions this year and will be in future, in my view.

We have often executed intraday transactions. This has advantages for us as well as our investors, as everyone is less exposed to market movements. It is also a very useful strategy when the market is crowded and many issuers are expected to raise funds in the same window.

But we also used the classic two-day approach to execute, which lets us allow for better price discovery and feedback from investors.

Seifert, LBBW: We are not talking about a zero-sum game where one issuer is taking away investor money that otherwise another issuer would have got.

Although many classified 2023 as a challenging year to do long-dated deals, two of the most successful trades that the EU has done — and LBBW was fortunate enough to work on both — were a tap of its 2048s and a tap of its 2052s.

When you see a trade like these you get evidence about the market that otherwise you wouldn’t have.

Whether every issuer would want to replicate that or not is a different thing but I think it has given guidance on that depth of demand that Andrea was talking about.

This is predictable supply — the EU doesn’t come with intraday execution, surprise deals. So, although the EU has taken a little bit of room away from the others, it has also brought benefits.

Engelen, EU: We understand we are the very clunky new kid on the block, coming into the market with very large supply.

We try to do it in a way that is most predictable, so other issuers can plan around it. It is not ideal for them to have to plan around it but at least they have the information.

I think what Patrick said is true; we are trying not to surprise the market and certainly not our peer issuers because that isn’t in anybody’s interest.

It’s an interesting question to what extent we are helping to build out the market. The feedback from market participants is that we have taken a market-leading role, not only in terms of defining issuance windows but also showing the resilience of market access.

That was particularly relevant in 2023, when over the summer a few trades by peer issuers were a little bit weaker — and then we have come with a trade that was very well received and opened up the market a little more.

An important thing for us is that we don’t agree that there is a strong dichotomy between SSA and European government bond (EGB) markets, particularly in the euro area. We think this is a false division, which doesn’t reflect the fundamental value, or the characteristics of the different assets brought to the market, particularly with regard to our bonds — which have a similar volume, liquidity and frequency of issuance as EGBs.

We are trying to tear down the walls between these two segments. This will help all SSA issuers benefit from broader, deeper investor interest when we can present the euro area as a continual spectrum from core, pure SSAs to EGBs.

But it is something we really must work for, and against market convention. There is a lot of inertia that has built up over decades in the way the market treats supranationals and agencies versus EGBs. We don’t think this is appropriate, particularly given our case as a hybrid issuer and one where the characteristics of our assets belong more in the EGB segment.

Engelen, EU: First of all, I don’t agree that we don’t have the volume or the longevity in our issuance. Even with the delays and the reduced funding target in the second half, we still issued €120bn in 2023, which places us very much at the top of the table. This will continue for quite a while.

We have mandates to build a debt portfolio of close to €1tr. The rollovers and the management of that portfolio will create such an issuance volume for the next decades. This will make us a very prominent player in the market, even if the debt management capacity is not used for any new policies.

We concluded that the only way to place and manage such volumes of debt is to adopt a sovereign-style approach to issuance.

There are many things you can discuss — whether we are institutionally a sovereign, whether our budget is directly financed by taxes or not — but I think the core of it is that we have the credit quality, volume, regularity and liquidity in our issuance approach that makes our bonds comparable to the most liquid EGBs in the market.

It is for an investor to decide whether he or she wants to seize that opportunity and to use our asset as an interesting complementary one in a portfolio that is there to diversify risk and to provide liquidity.

Finally, the issuance calendar. We are growing into a position where if the SSA/EGB dichotomy is not broken up, we will distort very much the SSA segment. That is not only related to issuance planning but also to portfolio and index structures.

If you look at the composition of SSA indices, we dominate them — and this will get worse.

Our issuance has a longer average maturity, which means that particularly if you look at the duration weight of our position in the SSA indices, they will almost become EU indices. So, the question is whether that makes EU bonds an appropriate tool to diversify an investor portfolio or a passively managed fund.

There is only one classification where we could be properly placed in a well-diversified manner, which is to put us on par with the larger EGBs; otherwise, we will always distort wherever we are placed.

Seifert, LBBW: Christian, I remember you said that if you were to only refinance maturing debt, you would still be the number four or five borrower in terms of volume out of the European government issuers.

The weird situation that we are in is trying to build a huge government-style issuer from scratch at a time when some of the existing EGB names have long established themselves and operate primarily in refinancing mode.

The EC is not a greenfield project but it is migrating an existing reality into something new. If you apply a schoolbook definition, some might say the European Commission is not a government issuer. But then it is about everything you can apply in terms of common sense, market understanding and size of the programme, the use of proceeds, the interplay between the EU’s funding and governments raising money and what purpose it serves. The EU has much more in common with a government than a classic supranational or agency.

Investors have been rather quick to understand this but more time and persistence is needed from everyone involved in market infrastructure, indices, the repo business, and so on, who seem to follow a tickbox approach — as long as one box remains unticked, you cannot qualify for a rule-based treatment. We all know which way it is going and clearly the EU is migrating to become a government issuer, or government-style issuer at least.

Becker, NRW: You are completely right that order books are significantly smaller than even a few months ago. Our €2bn sustainability bond in May generated demand of €13bn, but we only just hit the goal of €1bn in our last issue of the year in mid-November.

But while the days of the massive subscriptions may be over, to me, a subscription level of two to three times is completely sufficient, and it will make the allocation process much easier. We are happy with the investor demand we saw throughout the year.

With clear communication and a good secondary market curve, a fair price can be determined, although it may not be easy. But our bonds have seen stable new issue premium of 2bp on average in the first eight to nine months of 2023 before a widening to 3bp-4bp, but I don’t expect further movements. And I don’t see the need to widen from current IPG levels, as we could achieve a tightening of 1bp-2bp during bookbuilding in nearly all past issues, which suggest that these levels are stable and we can stick to them in the future.

Graupner, KfW: It is true that oversubscriptions are smaller compared with previous years and bigger premiums are necessary, and I can only echo what Andreas said – I don’t see any changes in 2024 on the IPG side. It is important that we find the right balance between price and size. And it’s also always important to have some flexibility.

Westdijk, BNG: We have been very comfortable with the lines in our books. The market was a bit spoilt by oversubscribed books — like for an issuer such as BNG to have a five times oversubscribed book. There was some normalisation this year but we are still seeing good books with enough lines and diversity of investors. While book sizes may be smaller, the quality is still good. That’s good for the allocation process.

I hope we don’t have to pay more in 2024. Issuers may have to pay up at the beginning, but I hope that will be reversed during the rest of the year. If you look at what BNG has paid in the market historically, prices are quite elevated now but that’s the case for a lot of issuers.

Weiss, ESM: We are in a changing market environment with ECB stepping back from QE programmes, and rate changes, which have led to smaller books than before. We have the flexibility to issue in different maturities, sizes and currencies, which means we can adapt and issue maturities that are in demand. Order books during QE were much larger and in our view we are in a transition phase and need to get used to smaller oversubscriptions. Before QE the oversubscription was on average 1.7 times and in our view a healthy order book will show similar oversubscription levels similar to before QE in 2024.

Stix, Austria: I would say that we see a kind of normalisation when it comes to order book volumes. However, given our strong average oversubscription of 6.9 times in 2023 — versus six times in 2022, when we issued less, and 8.2 times in 2021 — plus a solid quality of order books, I am not worried too much on that front. Fluctuations in investor demand have increased, which we have also observed in our syndications throughout the year. For example, we have seen a record order book volume of more than €61bn in our triple-tranche syndication in October, which even exceeded by far order books seen during the height of QE.

Sammallahti, Finland: It remains to be seen how the demand for fixed income products develops next year, because pricing is obviously a function of demand. Smaller order books can be a healthy phenomenon if the reduction in size reflects less order inflation. At the outset, I do not expect larger premiums as the prospect for a downturn and thus lower rates cannot be excluded.

Dore, World Bank: We have lost sight of the fact that the order book sizes we had in the period of QE, where there was a huge amount of liquidity and very little differentiation between credits, were the exception and not the norm.

It’s unbelievable to get questions about whether we expected a larger size, when we get a $3bn 10 year trade done, whereas before we would have been happy with a $1bn 10 year trade. Our asset class benefited from the flight to quality and funded massive amounts through large deals, but we need to get back to where we were before this period.

And sometimes there is confusion between the size of the order book and the quality. There is a push in some cases by issuers to have massive order books, and a transaction is seen as successful because of that. That’s not necessarily the case: you may have a much smaller transaction with such high-quality orders that you won’t have a problem in terms of allocations. Or you may have a massive order book and could barely allocate a proper solid $3bn transaction. The focus should be on quality when measuring the success of a transaction.

Engelen, EU: 2023 has been certainly different from the previous years but it was overall better than expected. It was also a year of very different halves. The first half of the year was more resilient than we thought, but the market had to find its feet again in the autumn after a time of weakness over the summer.

Nevertheless, we were quite pleased to see that, throughout the year, investor demand has been quite strong in all our trades, with order book sizes exceeding expectations. Of course, we had to offer higher concessions but it was not significantly higher, and pricing was very much in line with what you would expect in such a volatile environment.

One takeaway for me personally this year was that it has been very difficult to predict investor demand in individual trades. Investors have become a lot more hesitant to commit early in the process, and would rather wait until there is clarity on how a deal plays out before coming in — and that certainly introduces an element of uncertainty.

Nevertheless, we have proven our deep market access, and overall our trades have shown that there is strong demand from investors out there. With that, we hope we have also been able to bring gravity again to the whole segment with spillover effects to other trades. And hopefully we are now reaching the moment where monetary policy developments are bit clearer and investors will have the ability to formulate their view with more confidence and conviction.

Seifert, LBBW: I think book updates have always been important, but they are more important now with less buying from the ECB and more price differentiation. In a constantly moving market, there is no golden rule about what the appropriate new issue premium is.

Figuring out the right price has certainly become more challenging throughout the year, which in my personal view had a lot to do with the unwinding ECB purchases from the past. But I don’t think this was a particular challenge for SSA issuers, given their frequency in the market. In a way, it’s a buyers’ market – investors have choices, and they want to make sure it’s at a market-driven price when they put money to work. And the transactions that have not worked this year were typically those that tried to push through a pricing that was not justified by relative value considerations.

A book update basically tells investors that you have listened to them, and the transaction will be designed around their needs. But a strong issuer should also have the power to shape those transactions according to their objectives.

 

 

Engelen, EU: We have an established investor base, but a continuous task and one that we take seriously is to broaden and deepen that. We invest a lot of time in doing our homework, speaking with investors and approaching new accounts. We have seen an increase in investors from southern Europe throughout the year – something very encouraging for us in addition to the continued strong participation across the rest of Europe.

We have also seen the pickup in global demand, with new investors coming in from the Middle East and Asia, and increasing interest from South America. It does take a bit of time to get to know those investors who are not very familiar with us as an issuer, and make sure that they feel comfortable to open the lines to invest in us and diversify into the euro area, but there are encouraging signs for us to continue working in that direction. The continued normalisation of monetary policy across the globe will also bring more global demand that was not there during the time of negative rates back to the euro area.

Dore, World Bank: We noticed that some investors that you could always rely on in the past might not have been as active, and some very big investors were not putting in those large size orders as was expected. That’s a big reminder that we need to continue doing investor work to diversify and to have access to more investors, and that has been a key focus for us. We are also getting a lot more questions from investors on ESG or sustainability and impact, so we are spending a lot more time on engaging with investors on those topics and producing detailed impact reports yearly. Sustainability and impact reporting is another big focus for us.

Westdijk, BNG: BNG also wants to be as diverse as possible and we saw in 2023 the return of Asian investors in our books again, for example. But I also agree with Andrea that more investors are exploring or even demanding ESG-labelled issuance, and we are also getting a lot of questions around that. Having the dialogue with the investors on the sustainability theme is an important part of our strategy and will continue into 2024.

Becker, NRW: We have invested a lot of time and effort in investor relations since the beginning of the 2000s, and succeeded in building a broad investor base for us both geographically and sector-specific. We were able to attract additional investors when we began issuing sustainability bonds in 2015.

And the work is paying off – we can rely on our broad investor base to support us even in times of uncertainty and volatility. Of course, depending on the market situation, you have always individual investors or geographical groups that may be more active or less so, but at the end of the day, we were always well positioned to successfully place our bonds at a fair market price. So, I’m confident we will continue on this path.

For example, we were in the US and Canada in early November and will see if we may go to the Swiss or Austrian markets early next year. We will continue doing intense investor work in the future with the hope that investors will be there when we need them.

Graupner, KfW: It’s the same story on our side. We have seen some changes, from the investor type perspective, but also from a geographical point of view. Some investors – who are not our end investors anyway – have completely disappeared and others have come in with smaller order sizes. But on the other side, we are looking at more international investors, for example Asian accounts, in our euro trades with the return of positive yields. KfW is very well known, but we continue to have intensive dialogue with investors.

Seifert, LBBW: Investor work is called ‘work’ for a reason – it really is hard work. There are no short cuts, and it’s all about doing your due diligence and taking nothing for granted.

My expectation for 2024 would be that the normalisation of monetary policy and the possibility of reaching peak rates, alongside the normalisation of the yield curve, should reopen parts of the market that have been closed for a long time. Hopefully the investor work done by issuers will lead to more opportunities to access the market, and also give a home to investors who have been buying illiquid assets such as real estate and private equity and provide a way to reduce complexity and risk in their portfolios.

Stix, Austria: Overall, we are observing that our investor base is pretty stable but it is worth mentioning the further diversification of our investor universe by the implementation of a holistic, comprehensive green funding programme in the middle- and long-term segment as well as in the short-term segment. For example, we have seen about 20% new green investors in our first green bond issuance, which was even above expectations. Through the issuance of green T-bills and commercial paper we were also able to attract new investors, and we have also already been successful in building up a loyal green investor base in this aspect, proven by the fact that about 50% of the green short-term investors have rolled over their positions in our green T-bill auctions. Apart from that, we see of course a comeback of real-money investors due to the higher yield environment, which also leads to a higher interest from retail investors.

Next year we will continue with our comprehensive investor relations work, which we have ramped up considerably since 2022, and the continuation and extension of our green funding programme.

Weiss, ESM: The ESM as a lender of last resort and prospective backstop to SRF, must always be able to raise funding in the market. It is therefore crucial to have a wide and varied investor base upon which to count. We have a loyal investor base with whom we maintain a long-lasting relationship based on ongoing communication and trust. We currently count about 1,800 investors worldwide and each year we still attract new investors.

We give a lot of importance to investor diversification and always try to widen our investor base. By offering a wide range of products – bill programme, bonds from short end to very long end, N-bonds and the ESM dollar programme, we can appeal to a very wide range of investors.

We keep regular contact with investors and get feedback from them. We also analyse the impact of our meetings with them in our transactions.

The year 2023 was marked by the strong support from euro area bank treasuries, which made up half of our investor base. We also saw investors returning to our books attracted by the positive yield environment and via the return of the ESM to the US dollar market.

In terms of targeting investors, ESG topics and explaining the ESM approach played an important part in our IR activity this year. We published in July our inaugural ESG Summary report, where we explained our holistic approach to ESG and how the ESM can be considered a sustainable issuer. Later in 2023 we will also publish the United Nations Principles for Responsible Investments Transparency report. The ESM became a signatory of the UN PRI in February 2020.

Seifert, LBBW: The ECB’s holding of SSA and govvie bonds is a potential limitation on how valuable secondary prices can be. At the same time, with the return of real money investors, secondary turnover and flows are increasingly relevant. It makes absolute sense to make sure that secondary market is functioning as well as possible to increase transparency for investors and issuers.

For smaller issuers, like some of the smaller German Länder, I would personally never take screen prices as sole evidence for where a primary deal should price. It’s a safety measure to look at recent primary issuance for a reality check, and it’s also important to listen to investors because they are the ones who basically have the final say.

Sammallahti, Finland: It appears QT has some bearing on secondary market liquidity in smaller markets like ours if measured by turnover. Yet I feel our primary dealers are doing good work in promoting the RFGB market and in my understanding end investors have good access to secondary market liquidity. Given this, price discovery for new issuance would not be an issue. Arguably interdealer turnover has fallen as dealers aim to internalise flows. However, encouraging dealers to turn the bonds around among themselves is not really testament of secondary liquidity for investors and thus we do not see the need to encourage that in RFGB.

Weiss, ESM: Liquidity conditions in secondary markets were volatile in 2023 due to ECB ending reinvestments of APP as well as other factors which impacted markets like the banking turmoil in March. Generally, we observe during turmoil times that liquidity is lower and that investors are finding it harder to execute trades. Screen prices may not be executable and ‘covers’ further away than expected.

On the other side, we see that new issues or taps influence liquidity positively. With the ending of the APP reinvestment the free float — meaning bonds available for trading and not in the Eurosystem — of recently issued debt is much greater. For supranational issues, the Eurosystem issuance limit is 50% of an ISIN, compared with 33% for EGBs.

We monitor secondary market turnover very closely and ask all 29 banks of our EFSF/ESM market group to report monthly. Over the past 10 years we have gathered a lot of data, which helps us spot new developments. The reports exclude Eurosystem purchases and we have seen an encouraging trend upwards in overall EFSF and ESM bond and bill turnover.

Stix, Austria: The secondary market performance of Austrian government bonds and bills is stable this year and investors report no major problems with our level of liquidity. More issuance helps in this regard — €50bn RAGBs issued so far in 2023, versus €44bn last year – and we also try to help the market by increasing the outstanding volume of existing bonds by the use of bilateral taps.

Engelen, EU: Secondary market liquidity is at the front and centre of our work and part of the new approach we are taking. We dedicate a lot of time to making sure that we are seen as an asset that can be trusted to be traded in the market, especially coming from a time where the trading of our issuance had been very limited.

We have seen an encouraging build-up of liquidity in the market and are taking additional measures to support secondary market liquidity further. We introduced on November 1 an arrangement to encourage our primary dealers to quote regularly on electronic platforms, which will support the price discovery. We are also working on establishing a repo facility to support the market and provide a backstop. We are also promoting very much the use of our bonds as a collateral instrument in all kinds of capital market transactions in the system, which will attract trading activity and the liquidity in our bonds.

All of these are geared towards ensuring the liquidity on our benchmark lines and for us to be the type of asset that can really play a broader function in the financial system. If we get there, we can truly trust the secondary market prices of our curve.

But liquidity is also a double-edged sword. It helps you in good times, but when volatility hits the price reaction in our curve is also more immediate — something we have seen in 2024. We take it as an encouraging sign that we have good liquidity, but we are mindful that prices can go in all directions. But for primary issuance, we can certainly rely more on our secondary market prices for a solid input to fair value assessment.

Westdijk, BNG: Indeed, we are not as big as the other issuers on this panel, but I don’t see any problems. In dollars, we were less active in the past couple of years but are getting more active again.

I agree with what Patrick said. Screen prices tell a story but not the whole story, and investors do have the final say in it. We get things like secondary markets reports from our investment banks to monitor how liquid our bonds are and get a sense of where the market is, but discussions with investors may be the most valuable information.

Dore, World Bank: It’s an interesting point that Christian mentioned earlier. We always say that we want more hold-to-maturity investors, but at the same time we want some level of turnover in the bonds, as a measure of liquidity.

We have indeed seen some challenges in 2023 when trying to figure out primary pricing based on secondaries, particularly in currencies such as the sterling market, where we had significant volatility at the start of the year. There were massive price differentials even across the key banks in that market, so how do you really try to determine a fair value and what’s a realistic new issue premium? But it became less challenging as the year progressed and the volatility has largely settled down.

Now we have some bonds that are just trading at what we refer to as ‘technical’ because of supply-demand issue, and the challenge is to ensure that the new issue premium is not causing you to reprice a market, so you have got to be very careful, especially when doing a tap, to not harm the investors holding the bond.

Overall, we do expect our underwriters to provide liquidity in the bonds, and we also try to provide liquidity through our buyback programme. So, we make it clear to investors that they have the ability to get out of a position if they need to.

Graupner, KfW: Secondary performance is always a question for many investors, and we think we have done a good job if there is a performance of low-single digits within five days of the primary issuance.

Liquidity is one of the most important things for us and a main argument to invest in KfW. We are having more dialogue with the trading desks about where the market is at the moment, what were the volumes traded by the different platforms and market participants.

We are very happy to extend the outstanding size (in euros) of our lines up to €7bn to provide more liquidity because we were told by the investor base that they prefer the bigger transactions instead of having some smaller lines. For 2024, we are considering having fewer new lines but with higher volumes on each line.

Becker, NRW: One additional thought to what Jörg just mentioned. One consequence from the rapid increase of the interest rates and the QT programmes is that many bondholders are sitting on enormous book losses due to price declines, and it’s understandable that they are afraid to realise those losses. That’s especially true as NRW has occupied the ultra-long end of the curve with significant demand up to 100 years. And that inevitably removes some liquidity from the market, as those bonds with a price of just over 30 will not be traded.

But flexibility and liquidity are the key words, and I think high quality issuers like KfW — and hopefully NRW as well — will continue to generate enough demand and strong sales in the future. Although the screen prices do not tell the truth at all, with clear market communication and some input from our curve, we will find the right price in a fairly narrow range.

Graupner, KfW: The expectation is that agencies will outperform versus govvies — but, versus swaps, we are potentially facing slightly wider levels ahead. As an issuer who prices transactions versus swaps and not govvies, we just have to take the market as it is. Potentially we could do more transactions earlier in the year, but we have not decided on that yet. All in all, we are acting as a bank and we have to manage our positions very carefully; this is something we always do and is also a given for 2024.

Becker, NRW: I currently do not believe the expansion in swap spreads that we saw particularly in the second half of 2023 will continue in 2024, and we will be able to maintain the level reached, with a relatively low funding volume of €10bn and no new debt — hopefully even moving a little bit closer to the swap curve again. But of course it could go the other way as well. The hope is that we won’t see a further widening of the swap spreads.

Dore, World Bank: I wish I could predict swap spreads because it does impact our cost of funding as an asset swap-based issuer. With rates going up, we have seen a widening of spreads across the whole asset class. This can be viewed as a normalisation after a period of very tight SSA spreads during the low interest rate period.

Weiss, ESM: Irrespective of the market environment, we have a fixed amount to raise. We cannot influence the market environment and must issue in all circumstances. What we can influence, however, is when and how we issue debt and which maturities or currency to choose. For 2024, the elevated levels of swap spreads and yields should not present a problem to issuance, rather offering support by making storing risk more digestible.

Engelen, EU: It’s a good question. We are still priced against the swap curve and those measures we are taking are to break this structural feature of how the market treats us. For an issuer with a liquid curve, there is no necessity to trade or to price against the swap curve.

It is painful for us to see the wedge between the swap curve and the Bund curve over the years, given we consider our bonds as having the same characteristics of EGBs. As I said before, we are working on overcoming this dichotomy of us versus EGBs, and hopefully at the next roundtable there will be no need to pose the swap spread question to me anymore.

Seifert, LBBW: Spreads are looking fairly stable for 2024, on the assumption that supply will be slightly higher It will not be skyrocketing and there will also be a lot of diversification into other currencies to help us manage this supply. The long end should also be reopening to help issuers access pockets of demand across the whole spectrum.

And what spreads are telling us, based on the historical context, is that we have probably managed a large part of the normalisation of monetary policy already. But that does not mean issuers will be pricing through their curve. Even if spreads were to remain relatively stable for the SSA and govvie issuers on this panel, the base case expectation is they still need to pay a moderate new issue premium.

Engelen, EU: We are serving an institution which has been at the forefront of fighting one crisis after another over the years, and we have used our borrowing programme to take forceful measures against these crises.

There are many factors that could deteriorate the outlook going into 2024, and we just need to be prepared to face the situations as they come. As an institution, we try to find the political solutions at the highest level to address the most urgent impending crises, and that probably distinguishes us from other issuers. Our mandates are adaptive to the political realities in a much more flexible and dynamic manner, and we need to reflect that in our planning.

Sammallahti, Finland: We are not expecting any particular disruption. Of course, it will be interesting to see if monetary policy in Europe continues to be geared toward fighting inflation and how the signalling on its direction is received in the market.

Dore, World Bank: We do benefit from flight to quality during those massive crises, but we don’t want to go through another one. Our funding programme suddenly increased and we had to raise $80bn two years in a row between IBRD and IDA. Even though we were able to deliver some of our largest and best trades ever during the pandemic period, I would love to not have to be such a large issuer, as these massive funding programmes just take away a certain level of flexibility, because we would have to access the market constantly. This is compounded by the reduced number of issuance windows because of increased volatility.

Excess volatility is probably my concern, as opposed to volatility itself. This can affect market access and new issue pricing.

Graupner, KfW: The further central bank policy is still not entirely transparent, so there are more surprises possible — with a huge impact on the fixed income markets. The upcoming election in the US could also influence the market. And global growth, continued geopolitical tensions and supply chain disruptions could weigh heavily on the economy.

Becker, Land NRW: I could answer this question in a quite short form: the most disrupting feature is uncertainty. We all know that economic development may be subdued in 2024 and inflation may be more persistent, but we can take appropriate positions to it.

What we don’t know is what could cause problems. On top of my list is the geopolitical crisis in the form of the Russian-Ukraine war and the Middle East conflict, and it’s hard to imagine what would happen if these were to spread regionally. The consequences on the economies and the people living there would be devastating. It would also affect our work, but unfortunately there is little we can do to counter it, as we cannot stop or postpone our funding programme. So, our task will be to find the right windows under whatever conditions in 2024 to cover our needs.

Stix, Austria: The biggest risk in my view is coming from a combination of geopolitical factors coupled with potential inflationary surprises and associated monetary policy actions. In our funding strategy we try to address this as well as possible — for example by having enough flexibility in the issuance strategy such as tenor choices and timing, while giving adequate guidance to the market. The further broadening of our investor base, with a continued focus on our two-pillar funding strategy – broad green and conventional funding programmes ranging from money-market to capital market instruments – also helps in this regard.

Weiss, ESM: For issuance, episodes of over-extended volatility as seen in March (risk-off) and September-October (policy outlook related rates repricing) would likely pose the greatest challenge.

How to mitigate that? Well, issuing a dual tranche is a very useful tool as you can reach out to different investors in one go, while reducing market impact on one maturity. The EFSF and ESM have used dual tranches many times since we exist. We will pay close attention to market conditions and investor demand reflected to us via the Requests for Proposals we use, to choose the right maturities, currency, and issuance strategy for each transaction.

Westdijk, BNG: A lot is going on at the moment and there is no crystal ball. What could disrupt markets in general are geopolitical risk, uncertainty in energy prices and inflation, and potentially the US elections next year. And how do you mitigate that? The short answer is to be nimble.

We are a small issuer but we try to be as nimble as possible. We want to pick the right windows but also be the stable issuer that we have always been for almost 110 years. There have been many crises and we are still here to continue serving the Dutch public sector.

Seifert, LBBW: Certainly, I would share Koen’s view about being nimble. It’s also about resisting the temptation to think you know what’s going to happen. The (geo)political events and drivers function differently than markets and economics, and many of the less pleasant surprises we have had in recent years were around false certainty of political events.

I vividly recall the shocks that went through markets when Donald Trump surprisingly won the US presidential election, and the US election is going to be one challenging event in 2024. But we know it’s coming and when, so there is plenty of time to work around it. Again, it’s about doing the hard work and taking nothing for granted. It might sound straightforward or even boring, but let’s not forget we are in a segment serving high safety needs, so there is nothing wrong with sticking to what has worked very well in 2022 and 2023.