By David Oakley and Gillian Tett
Published: March 24 2010 18:12 | Last updated: March 24 2010 18:12
This month Carl Heinz Daube, the head of Germany’s formidable debt management agency, did something that would have seemed almost unimaginable – or unnecessary – five years ago.
He travelled to China and Singapore for a meeting with two of the world’s biggest investors – as part of an attempt to charm a new pool of investors, such as sovereign wealth funds – who might be willing to buy German government bonds.
The trend is spreading fast. Until recently, countries such as Germany, which have long prided themselves on having a triple A debt rating – and relatively low yields – felt little need to court global investors.
But as government debt burdens spiral higher, and the eurozone quivers as a result of the fiscal turmoil that surrounds Greece, the pressure on debt managers to refine their sales skills is rising.
What Carl Heinz Daube’s trip shows is that even the big economies need to cultivate the buyers of their debt and build up their relationships with investors, such as the SWFs, which hold billions of dollars in government bonds.
China’s State Administration of Foreign Exchange, or Safe, and Singapore’s Government Investment Corporation, or GSIC, have between them an estimated $600bn in assets under management, with roughly 20 per cent held in government bonds.
pop-up: sovereign wealth fundsMr Daube says: “We have to borrow much higher volumes these days. Hence, it makes a lot of sense for us to meet investors, so we can answer their questions. They appreciate this.”
Robert Stheeman, head of the UK Debt Management Office, adds: “It has always been important to talk to investors, both domestic and international. But today, the Treasury and the DMO more than ever need to engage with investors to explain the government’s fiscal position and borrowing programme.”
Mr Stheeman, like Mr Daube, met key investors in Asia at the end of last year as he prepared for the critical months ahead of a UK election, expected in six weeks’ time.
Both men realise they can no longer simply announce a government bond auction and rely on domestic and international investors to buy their securities.
This was demonstrated last year when both Germany and the UK saw government bond auctions fail as the overwhelming supply of sovereign debt to pay for bank bail-outs and economic fiscal packages began to swamp the market.
Investment banks are also aware of the new demands on debt managers to make themselves more accessible to the people who buy their bonds. Last year, for example, Citigroup arranged a conference in Tokyo, where five European debt managers addressed 100 Japanese portfolio managers on the merits of buying their government securities.
With the regulators moving to crack down on some parts of the market, and others failing to produce the returns seen before the financial crisis, banks see opportunities to make money in the government debt markets.
This has prompted many banks to seek primary dealer status, which gives them the right to take part directly in government bond auctions, allowing them to buy and sell securities for a profit. This has become increasingly lucrative because of the higher volumes due to record issuance.
In recent months, nine banks have won primary dealer status in the US, UK and Europe. They include RBC Capital Markets in the US; Nomura in the US and UK; Jefferies in the UK, Germany and The Netherlands; Société Générale in Ireland and Austria; ABN Amro in The Netherlands; UBS in Ireland; Santander in France and BNP Paribas in Denmark.
“The large amount of government debt does provide opportunities for banks, both in the ability to make fees from government bond syndications, and the trading opportunities from the increase in volatility,” says one senior banker.
“Most banks have boosted their fixed income and government bond desks at the expense of other areas, such as securitisation that have been hit in the wake of the financial crisis.”
In this new climate, governments are increasingly turning to the SWFs as the ideal group to buy their bonds, particularly as many SWFs have increased their buying of government securities in recent months.
It has also led to the creation of a new group called the Official Monetary and Financial Institutions Forum (Omfif), which has the specific task of bringing central banks and SWFs together to help debt managers sell their bonds.
This month saw a gathering, arranged by Omfif, of more than 50 central bankers, sovereign wealth fund officials and asset managers in Frankfurt with the purpose of improving dialogue between these groups in areas such as asset allocation and management.
Omfif is planning a similar gathering in Kuala Lumpur in May.
The need for government debt managers to woo SWFs is only likely to increase as government bond issuance is expected to remain at record levels for years to come, with increasing worries over the so-called crowding out effect, where the vast amount of debt exhausts the capacity of the market to absorb it.
However, Mr Daube says: “I don’t think we will ever reach a stage where governments are crowding each other out, but we could reach a point in two or three years’ time where sovereigns may face quite a reasonable competition from the private sector if government issuance remains high.”