Cracks appear in usually solid public sector bond market

Fri Oct 9, 2015 4:19am EDT
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* Ontario cancels, IADB falls short in tricky market

* Investors turn picky in the face of rates volatility

* Banks and central banks scale back SSA paper purchases

By Abhinav Ramnarayan

LONDON, Oct 9 (IFR) - Rates volatility and a shrinking investor base are disrupting a public sector debt market that was once a byword for its dependability and strength in the face of adversity.

Investors are proving unforgiving if the structure of deals or price tags are not spot on. This week, the Canadian province of Ontario became the first SSA issuer of the year to cancel a deal and Inter-American Development Bank ended up printing an uncovered US$1bn four-year - its smallest benchmark trade in two years.

The trades that did enjoy success, such as Italy's 3.5bn September 2032 inflation-linked bond and the European Investment Bank's US$4bn five-year benchmark, were timed and priced in a cautious manner that took into account any potential volatility.

Italy announced its transaction well after the European market closed to avoid potential shocks, and EIB, having waited for weeks for the right window, still priced its deal with a healthy new issue premium.

"It shows there is no room for complacency in this market," said a banker at one of the lead managers on the Ontario trade. "You are beholden to a smaller number of investors than perhaps you were historically."   Continued...