LONDON, Feb 7 (IFR) - Do you feel SAFE?
The answer was clearly 'no' for many sovereign, supranational and agency issuers this week, which shied away from launching new benchmark deals as one of their largest investors - China's State Administration of Foreign Exchange (SAFE) - took some time out to welcome in the year of the horse.
The volatile market backdrop was not exactly ideal for new issuance anyway, but this has rarely stopped the savviest bank originators from getting some business off top-rated clients with their timeworn flight-to-quality mantra.
Even before the week began, however, the writing was on the wall for primary activity, with Lunar New Year celebrations on the horizon.
"It would definitely be a risk to launch a new benchmark with one of the largest investors in the world absent," said one head of SSA syndicate last Friday.
As it turned out, the only meaningful issuance came in the form of a very euro-centric arb trade from KfW, a domestic-led FIG/SSA hybrid deal from Italy's Cassa Depositi e Prestiti, and a handful of short-dated floating-rate notes which SAFE, according to syndicate bankers, does not traditionally buy.
Despite the best efforts from bankers to try to persuade their clients not to rely too heavily on the increasingly secretive SAFE, the lack of issuance demonstrates how beholden the market is to one investor.
SAFE has been the largest investor in SSA products over the last years in the two major currencies of US dollars and euros, outmuscling Norway's oil fund, say bankers.
The entity, which manages China's USD3.8trn of foreign exchange reserves, has been known to place orders of up to EUR2bn (USD2.7bn) on a single SSA debt issue, said market sources.
It was not always that way, however. It took the appointment of star Pimco portfolio manager Zhu Changdong in 2010 to start to diversify its investments away from US Treasuries.
Not only did the arrival of the low-key figure known as the "invisible man" shift the focus toward spread products and corporate debt, it also changed SAFE's entire approach to primary markets.
Syndicate bankers say that before Zhu's arrival SAFE would be one of the first investors to express early interest in a deal, giving issuers comfort of large anchor orders before they formally opened books. Now, salespeople struggle to get any feedback from SAFE, and are often shocked when it places chunky orders late in the bookbuilding process.
Sometimes this can help to bail out struggling deals, but other times it can cause allocation migraines.
Reuters reported last week that Zhu is set to leave his position, raising the question as to whether his legacy will live on.
The more pressing question for issuers, however, is whether SAFE is going to continue its love affair with US dollar-denominated products.
The onset of the US Federal Reserve's quantitative easing programme has sent shockwaves through the market, creating uncertainty around where Treasury rates will stabilise. Bankers say SAFE's participation in recent dollar SSA deals has been declining in recent months.
Then there is China's own agenda of trying to rebalance its economy.
The government wants to reduce its reliance on the investments and exports that have fuelled breakneck economic growth over the past three decades in favour of consumption and services to generate more sustainable growth.
Theoretically, this could encourage China to reduce its holdings of foreign reserves, removing the cap which has kept its currency from rapidly appreciating. The resulting inflationary pressures would hit exports but could bolster domestic consumer spending.
These are not immediate problems for SSA issuers, however. The bark of Fed tapering has proved to be much worse than its bite - a further USD10bn of tapering confirmed last month was barely felt in the Treasury market, and China's economic rebalancing act will play out over decades to come.
As this week proved, SAFE remains the most influential investor in the SSA market whether that is healthy for the market or not.