LONDON, April 12 (IFR) - Banks' share of government-backed
euro-denominated bonds in the year to date has almost doubled
from 2012, Barclays research showed on Friday.
Public records of bonds issued by supranationals,
sub-sovereigns and agencies (SSAs) show that banks are now the
largest investor class in the sector, taking down 40% of all
issuance, versus 21% across all of last year.
The research states that a drive from banks to build up
liquidity buffers is contributing to this trend. Those working
on the deals, however, say it is also symptomatic of a decline
in real money interest in the sector.
"Spreads across the sector have been so much tighter than
last year, so there is limited relative value for some of the
key real money investors," said one syndicate official.
"As a result, banks have to prop up deals a little bit
Spreads have ratcheted in for many of the largest euro
issuers since last summer.
The European Financial Stability Facility, for instance,
priced a new five-year bond at mid-swaps plus 9bp this week. It
last issued a bond in the same maturity in January at mid-swaps
plus 17bp, and before that last October at plus 23bp and last
July at plus 50bp.
Low returns are making some of the most risk-averse buyers
of Triple A rated government bonds look elsewhere.
Around two-thirds of respondents to an RBS survey of 60
central banks this month said they were more inclined to invest
in equities than a year ago, while only 25% still voiced a
preference for Triple A rated government bonds.
It would appear sub-sovereign issuance is also losing its
Banks, however, have a natural demand for short-dated
liquid assets in order to show regulators they have enough
securities to sell if times are bad.
But there is some concern that the Basel Committee's
decision in January to include Double A rated RMBS notes and A+
to BBB- rated corporate bonds in their definition of
high-quality liquid assets for liquidity coverage purposes could
have a detrimental impact on the SSA sector in the medium term.
Observers speculated that bank treasuries might show a
preference for higher yielding assets, which as a result would
see a decline in the amount of investment in the SSA sector.
The research published by Barclays on Friday shows this has
not really materialised yet.
"Banks are generally more conservative in their approach
these days, and that's probably why a lot of this money remains
parked in SSA bonds," said another syndicate official.
However, there has also been limited alternative
high-quality supply, with only some selective low-beta corporate
and covered bond issuance so far this year.
SSAs have undoubtedly benefited from this trend, and many of
the heaviest users of bond markets are well advanced in their
annual funding plans.
Issuers will be cautious, however, about leaning quite so
heavily on this one investor group, especially as accounts may
now be inclined to look elsewhere if other high-quality
alternatives spring up.
(Reporting by John Geddie; Editing by Philip Wright, Julian