Public Sector Bond Market: What to expect 2024

As the largest segment of the debt capital markets, the public sector bond market should continue to evolve. In 2023, the return of liquidity was felt in the European bond markets, but smaller issuers were still experiencing issues due to the lack of liquidity.

The public sector bond market is expected to continue to evolve in 2024 with various developments. Some of these include hybrid capital by development banks. Also, the European Union’s journey toward sovereign status and the debt restructuring in emerging markets are expected to have an impact on the bond markets. 

• Boosting Liquidity 

Despite the importance of improving liquidity for issuers, it is still important that the various measures that are being implemented to boost this process are carried out in a way that is both efficient and effective. Some of these include the establishment of incentives for debt management offices, the increasing of fast money accounts, and the revamping of the leverage ratio of banks.

A survey conducted during the SDI’s European Sovereign, Agency, and supranational forum last year revealed that over 70% of participants believe that allowing non-bank financial institutions to act as primary dealers would improve the liquidity in the market.

• Improve the price discovery process for small issuer 

Due to the lack of liquidity in the market, the price discovery process for public sector borrowers became more challenging in 2023. This resulted in the need for both banks and issuers to work together to find solutions to improve the process. One of the most effective ways to improve the liquidity in the market is by increasing the number of taps of outstanding lines.

• EU will make further steps towards sovereign status

In 2019, it made significant progress toward this objective by introducing various measures aimed at improving the liquidity in the secondary market. These include the establishment of quotes commitments for primary dealers and the classification of government bonds under the same haircut framework.

In addition to establishing a repurchase agreement (repo) facility for its financial institutions, the EU is also expected to implement other measures to boost the liquidity of its bonds. These include the establishment of a futures market.

• The improvement of the market infrastructure will continue to accelerate.

The efforts to improve the efficiency of the bond market are expected to continue. According to a survey conducted by SDI, the most common issue that the bond market encounters is the lack of documentation. Other areas where improvements can be made include automating and standardizing order book processes.

• Despite the various initiatives aimed at improving the efficiency of the bond market, digital bonds are likely to remain a distant prospect

Digital bonds will not be adopted in the mainstream due to various factors, such as the lack of a standard for the structure and operation of these transactions. Market participants are also focused on improving the efficiency of their operations instead of introducing new technology. In a survey, the SDI found that only 29% of the respondents are planning on using blockchain or distributed ledger technology in debt issuance.