Incorporating supranational bonds into your fixed-income portfolio can offer several key advantages. Firstly, it enhances diversification by reducing your reliance on domestic issuers and sectors, mitigating the impact of potential economic downturns or credit events within your domestic market. Historically, supranational bonds have exhibited a low correlation with domestic market movements, further enhancing portfolio risk-adjusted returns.
Why consider supranational bonds?
These organizations, such as the World Bank, the International Monetary Fund (IMF), and the European Investment Bank (EIB), are established by multiple countries to promote economic development, financial stability, and global cooperation. Standard & Poor’s defines supranational institutions (or “supras”) as institutions that are owned or established by the governments of two or more countries. They are usually formed by international treaties to achieve specific policy objectives and are not subject to commercial law. Most supras are multilateral lending institutions (MLIs), created to provide loans to countries or guarantee their obligations to facilitate economic development, regional integration, or cross-border trade. Sovereign, supranational, and agency bonds (SSAs) are bonds issued by institutions like the World Bank.
Understanding Supranational Organizations: Definition and Function
Globally, emerging-market governments have already raised over $245 billion in dollar- and euro-denominated debt this year — the highest on record since at least 2014, according to Bloomberg data. This document may contain statements that are not purely historical in nature but are “forward-looking statements”, which are based on certain assumptions of future events. Forward-looking statements are based on information available on the date hereof, and Invesco does not assume any duty to update any forward-looking statement. There can be no assurance that forward-looking statements, including any projected returns, will materialize or that actual market conditions and/or performance results will not be materially different or worse than those presented.
FP Expert Opinion: Robert Yeung on the SSA Market
However, it is worth pointing out that investors considering these bonds will look to hold their positions for the medium-to-long term as frequently trading them will incur higher transaction costs. Supranational, sub-sovereigns and agency (SSA) bonds are a distinct but often overlooked sub-asset class within fixed income. We believe they can offer an attractive investment opportunity to institutional investors due to a potential improved yield over government bonds, their typically higher credit ratings and a diverse risk profile. The bonds are typically rated AAA largely due to diversified funding sources, regulatory oversight, high liquidity and international support in times of crisis. The bonds are backed by multiple governments, which must pay capital into the institution if required. Additionally, unlike sovereign fixed income, the effects of country-specific shocks are mitigated through the pan-regional funding structure.
What’s driving demand for INR-denominated supranational bonds?
By balancing their risks with their advantages, supranational bonds can play a crucial role in achieving both financial and social objectives. For offshore investors deciding between the two, supra-issued INR bonds could be attractive if the yield offered is comparable to IGBs with the same maturity. While supra-issued INR bonds although still quite liquid with bid-offer spreads of around 3 to 5 basis points, are certainly not as liquid as IGBs where bid-offer spreads can be as low as 1 basis point or less. The 2021–2023 inflation surge was characterized by inflation rising in many countries simultaneously due to a mix of, domestic and foreign, supply and demand factors.
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- We use security-level portfolio holdings data from mutual funds and construct a shift-share instrument based on the heterogeneity of sovereign bond holdings across funds.
- While supra-issued INR bonds although still quite liquid with bid-offer spreads of around 3 to 5 basis points, are certainly not as liquid as IGBs where bid-offer spreads can be as low as 1 basis point or less.
- We leverage this variation to study how investors adjust their portfolios and how the yields of national bonds are influenced by EU bond issuance.
Given that the INR is not yet a freely convertible currency, offshore liquidity conditions can often be quite different to those onshore. As all supra-issued INR bonds are offshore securities, their prices are subject to offshore liquidity conditions as well as being impacted by onshore IGB yields. Given the aforementioned factors, we believe current market conditions provide a good entry point for INR bonds issued by high credit quality supras in the offshore market. First, many supra-issued INR bonds are now offering similar if not higher yields compared to the IGBs with the same maturity profiles. Second, offshore liquidity conditions are improving, and the market has started to price in more Fed rate cuts in 2024 and 2025 as inflationary pressures reduce in the US.
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A Chapel Hill Denham representative confirmed their participation, while Citigroup declined to comment. According to a Bloomberg report citing people familiar with the matter, the federal government plans to issue 10-year notes alongside 15- or 30-year securities, pending final approval from the Ministry of Justice. The best example of a supranational entity—and the closest thing to a true supranational union the world has ever seen—is the EU. In the Europe Declaration of 1951, the founders of the first iteration of the EU—the European Coal and Steel Community—claimed to be creating a true supranational institution and thus laying the true foundation of an organized Europe.
- They are issued to finance projects with environmental and social benefits, such as sustainable agriculture, affordable healthcare in environmentally vulnerable areas, and community development projects with a strong environmental focus.
- Furthermore, these bonds receive extensive government support in times of crisis and are common targets for quantitative easing strategies, ensuring relative liquidity and price stability.
- The critical role of supranational organisations in the global economy and their strong ties to international financial markets ensure that their bonds are among the highest in terms of credit quality.
- For example, the World Bank has a strong track record of repayment and benefits from the backing of its member countries.
supranational bond definition
The nature of the institutions that issue SSAs means these bonds tend to have a built-in social component, and have traditionally been at the forefront of ESG developments. Supranational thinking gained in prominence in the wake of the two world wars in the first half of the 20th century. To avoid more tragic, costly wars, nations were increasingly willing to cede sovereignty on some issues—usually related to trade and business—to a vote of the members of a supranational organization.
At the same time, looking at the onshore market, IGBs are seen as risk-free as these securities are backed by the Indian government. The extent of this impact depends on whether private investors perceive supranational and national sovereign bonds to be substitutes or complements. In 2020, the EU Commission issued, for the first time and in large amounts, supranational bonds under the Next Gen EU program to support countries’ economic recovery from the Covid-19 pandemic. We use security-level portfolio holdings data from mutual funds and construct a shift-share instrument based on the heterogeneity of sovereign bond holdings across funds. We leverage this variation to study how investors adjust their portfolios and how the yields of national bonds are influenced by EU bond issuance. We think the market characteristics and our experience analysing issuers and delivering SSA portfolios shows how this segment of the fixed income universe can be used to help achieve investment objectives.
Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision. While generally considered to be of high credit quality, it’s essential to assess the creditworthiness of each supranational issuer. While rare, credit rating downgrades can occur due to unforeseen circumstances or changes in the issuer’s financial condition. Many supranational institutions, such as the World Bank and the International Monetary Fund supranational bond (IMF), possess strong financial foundations, diversified funding sources, and robust governance structures. A key strength of supranational bonds lies in their generally high creditworthiness.
We expect to continue to see supra issuers borrowing in INR to fund their projects in India. However, given the liberalization of India’s domestic bond market, it remains to be seen whether this issuance will shift from offshore to onshore. Governments, central banks and regular banks often buy SSA bonds, but they can also be purchased by retail investors. They can also be a useful tool for investors looking to speculate in other currencies in foreign markets, since they are liquid instruments backed by member institutions. Such supranational organizations are seen by many as a better way to govern the affairs of nations, with an eye to preventing conflict and promoting cooperation, particularly on economic and military matters.
They finance projects in areas such as infrastructure, innovation, and climate action. Supranational issuers with Asian or global mandates typically have large loan exposures to India given the country’s economic size and development status (Figure 1). They can be less liquid than regular government bonds and are issued in two to 10-year maturities.
Einstein suggested the organization include the U.S., Soviet Union, and Great Britain but such an organization was never formed. The EU, the closest thing to a truly supranational union the world has ever seen, was created in the 1950s to prevent neighboring countries from going to war. Erika Rasure is globally-recognized as a leading consumer economics subject matter expert, researcher, and educator. She is a financial therapist and transformational coach, with a special interest in helping women learn how to invest. Supranational bonds come in various forms, each with distinct characteristics and objectives. Investment banks Chapel Hill Denham, JPMorgan Chase & Co., Standard Chartered Plc, Citigroup Inc., and Goldman Sachs Group Inc. have been appointed as joint lead managers, while FSDH Merchant Bank Ltd. is acting as financial adviser.
Nevertheless, current spreads between supra INR bonds and IGBs are at tighter levels. In the chart below we find that the supra-issued INR bond yield briefly surpassed the IGB yield in September 2023. This was largely due to extremely tight offshore liquidity conditions as US inflationary pressure was building up and the market was adjusting its expectations of Fed rate cuts.
It is not a homogenous asset class, and therefore, those objectives can determine how a portfolio of SSAs is constructed and managed. There may also be an argument for using non-euro-denominated SSAs where it can increase the investible universe and regional diversification. In total, the ECB purchased over €160bn of supranational bonds which ultimately helped to maintain liquidity, support prices, and prevented heightened borrowing costs for supranational authorities. The critical role of supranational organisations in the global economy and their strong ties to international financial markets ensure that their bonds are among the highest in terms of credit quality.
