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June 2008 | ifr special report | 1 SOVEREIGN BOND MARKETS ROUNDTABLE

Editor: Matthew Davies Special Reports editor: Solomon Teague Co-Chairs: Rachelle Horn, Michael Winfield

Participants: Anne Leclercq (Belgian Debt Agency) Enrique Ezquerra Martin (Spanish Treasury) Jeffrey Hogan (BGC Partners) Simon Maisey (JPMorgan) Peter Nijsse (Dutch State Treasury Agency) Angelo Proni (EuroMTS) Christophe Rivoire (HSBC) Erik Wilders (Dutch State Treasury)

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he landscape of the European government bond markets has remained in essence unchanged during the turbulence of the last nine months. All sovereign issuers have been able to rely upon their credit credentials to attract investors into financing their borrowing programmes. While sovereigns, supranational and agency issuers have found a willing and receptive audience, covered bond issuers have been spurned. As a result, the secondary market has all but disappeared for some issuers.

The volatility of the period since last summer has resulted in attacks on the liquidity the street has been able to offer to the investor base. There has been a marked distinction between syndicated issuance and the auction process, throwing up differences in the secondary trading environment. The participants discuss the merits of trading debt sold in these different ways and look for a common starting point from which price discovery can begin in times of difficult market making conditions. There are nevertheless differences between similar sized sovereigns. The

DTSA maintains faith in its Dutch direct auction process, while the Belgian issuing authorities favour syndication, with both relying on auctions as well. Spain also uses a combination of syndication and auctions and has this year returned to the US dollar bond market to diversify the tools available to the Tresor. As a result of the shifts in the basis swap market, the participants discuss the merits of issuing in currencies other than the euro and, in the process, achieve both investor diversification and an attractive cost of funding. In addition the reasons for the recent moves in the basis are touched upon in a broader debate about whether this is a temporary aberration or a more permanent shift. The covered bond market, meanwhile, presents a different set of challenges – still largely to be addressed. Although the consensus of opinion among the representatives at the discussion is that there will ultimately be a restoration of electronic liquidity, the means by which this will be achieved are still be finalised. The inter-dealer platforms represented at the roundtable have been working with the European Covered Bond Council (ECBC) to present their own proposals to restore liquidity to this part of the market.

The migration of much of the B2B, as well as B2C business, onto the electronic platforms has – in part – been arrested by the rise in volatility. Yet as a result of changes introduced by some of the European sovereigns, there are now more eligible platforms on which to trade debt than there were previously. The introduction of competition is generally seen as helpful for the market. Its problems are cited as part of the wider credit crunch, not simply the result of having to maintain liquidity through one specific platform. The appearance of new platforms, it is argued, will ultimately be of benefit to the market as a whole as it continues to search for technological innovation and new ways of trading. It is hoped these will ultimately increase the depth of the investor base in the European bond markets.

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