Towards the end of 2023, Santander CIB identified that the dollar market would grow increasingly attractive for issuers heading into the new year. Pandemic emergency purchase programme (PEPP) reinvestments were being phased out in Europe, and SSA issuance euro supply was increasingly abundant. Dollar supply, meanwhile, was becoming comparatively scarce. Although in early 2024, the US Quarterly Refinancing Announcement provided an additional $41bn in dollar supply, Santander CIB saw that the Federal Reserve’s quantitative tightening would pull some $30bn out of the market — keeping the relative scarcity of USD assets intact.
“We were early in highlighting the attractiveness of USD levels to issuers as demand from overseas was evident from our conversations going into the end of 2023,” says Ignacio Bas, European head of SSA debt capital markets, Santander CIB said: “This helped to drive key conversations with the SSA borrowers and materialise on deals early in the year.”
Santander CIB was confident that increased dollar issuance would be well absorbed, and highlighted to issuers the deep pockets of dollar demand across the globe from Asia to the sovereign wealth funds in the Nordic and the Middle East region. “Investors have continually favoured dollar assets, especially in a market priced for perfection with no hard landing in sight in which dollar bonds can act as a risk off hedge,” says Ali Nauman, executive director, SSA debt capital markets, Santander.
Not only have the favourable dollar funding conditions that Santander first identified been maintained — they have improved. The Federal Reserve became more tactical with regards to its balance sheet policy, slowing the pace of its quantitative tightening programme by lowering the cap of Treasury bond reinvestments from $60bn to $25bn. A monthly redemption cap on agency debt and agency mortgage-backed securities has been kept at $35bn, and the Fed has reinvested any principal payments in excess of the $35bn cap into Treasury securities.
Santander sees these dynamics helping keep the dollar market relatively attractive to borrowers for the foreseeable future. Even if the US economic outlook moves towards a muddle-through scenario or even economic slowdown, dollar demand for SSAs is likely to hold. But if the economic outlook is unlikely to threaten dollar supply, the shifting political landscape might. Nauman says a pick-up in term premia due to the fiscal debate taking place ahead of the US elections could be the main risk for dollar funding going ahead. “But for as long as this does not materialise, we continue to expect USD funding to be increasingly attractive,” he says.
No matter how the market evolves, there is no bank better placed to guide borrowers through potential market changes. Santander CIB has built a well-deserved reputation for steering borrowers through different markets with intelligence and insight. “Having a strong presence in the LatAm region, for example, we have been close to many issuers in helping identify opportunities and diversify their investor base and currency mix,” says Bas.
Santander’s expertise has also been on display in the sterling market, where the main driving factor has been the strong appetite from investors seeking a pick-up on carry and to lock in yields before the much-anticipated rate cutting cycle. SSA issuers front loaded sterling supply in 2024 as investors sought to deploy over £10bn of redemptions from December, which Nauman notes amounted to £28bn of gross gilt issuance and £5bn of gilt coupons.
“When looking towards GBP, the cliff of redemptions towards the end of last year was a key event we highlighted quite early on,” he says. “With the cross-currency working, we were quick to help issuers in accessing the market and print record size transactions in the currency.”
Long a major force in the sterling space, Santander CIB has been busy as usual in the primary market in 2024. The year began with the firm’s first mandate from the World Bank in that currency. Santander CIB has continued to bring a string of impressive sterling deals this year, helping issuers make strategic use of the tap market. “This has been key for issuers taking advantage of when the cross currency has worked for both sides of the trade,” says Nauman.
So far in 2024, a major change has been the tilt away from the conventional UK government bond pricing towards the Sterling Overnight Index Average (SONIA) following a significant cheapening of asset swaps in the latter half of 2023. A dynamic that Bas notes has been well received by domestic bank treasury buyers.
So far this year, SSA supply in euros is also progressing well. Nauman points to the multi-year highs for asset swap levels, which have been helpful in attracting diversified pools of demand. “That includes new investors like peripheral real money accounts and foreign investors that had not been active in size in the SSA market, at least not on a structural basis,” he says. “The combination of healthy supply numbers with diversified demand has produced a remarkable pick-up in the secondary market liquidity and a much clearer price discovery amongst market makers.”
As the first half of the year draws to a close, the larger SSA issuers have already completed close to 60% of their expected euro funding for the year. All eyes are now on the European Commission, which is finalising its funding plan for the second half of 2024. But Bas says the dynamics should continue to provide a solid platform for issuance in the coming months. “The amount of net supply in euros continues to be very positive and we are expecting the ECB’s quantitative tightening operations to run at full speed,” he says. “We will be there to help borrowers take advantage of conditions and bring the best deal possible.”
