Sovereign, supranational, and agency bonds (SSAs) are part of a huge global market, and issued by institutions like the World Bank, whose activities support social initiatives. They’re also a way for investors to enjoy the safety of government bonds with higher yields – and, as market players become increasingly interested in environmental, social and governance (ESG) investing, they’re poised to grow in popularity. But it’s also a market that’s traditionally been the domain of professional institutional investors – and one that smaller institutional investors, including family offices, have been slow to participate in.
The Financial Pipeline spoke with Robert Yeung, global markets expert and Executive Advisor at the Ontario Financing Authority, about the draw of the SSA market, and why he thinks more investors should be taking a closer look at the bonds it issues.
The Financial Pipeline: What’s SSA and how did this market come to be?
Robert Yeung: Sovereign, Supranational, and Agency refers to a group of issuers that have been created with their own specific mission or individual purpose. This purpose will generally be in support of a very specific community or segment of an economy. In the case of Supranationals, it’s to try to create a larger, more collective good beyond any specific nation’s own interest. The market has been around for a long time, more than 70 years, but it’s one that a lot of non-professional investors are less aware of because it tends to be the domain of the professional investor, and it’s not very flashy.
FP: Can you give some examples of where to find these bonds or who issues them?
RY: The World Bank is a perfect example of an SSA. It’s a conglomerate of 180-plus nations whose mandate is to fight poverty and fund projects in some of the poorest nations and communities of the world. Obviously, one country can’t necessarily achieve that, so they have “clubbed” together within this organization which allows for a much more objective fulfillment of the mission. KfW, Asian Development Bank, European Investment Bank, Export Development Canada and BNG – those are all SSA issuers. Collectively, they issue in dozens of markets and
FP: What’s the attraction of SSAs?
RY: The most attractive quality is the safety. The majority of these agencies are government owned or sponsored, so there are variations of guarantees and support arrangements which
i make them strong credits, because there’s a (or many) taxing authorities behind them. The majority are AAA rated, and even if they’re not, they tend to be these very secure, safe investments as another common characteristic they are conservatively managed. That’s why some of the biggest investors in these issues are governments, sovereign wealth funds, and the bank treasuries, who use them to fill their liquidity requirements.
FP: Who are SSAs geared toward?
RY: They tend to be geared toward the institutional investor, because of their safety characteristics, the large issue sizes, and in some cases, because there’s some tax advantages. I don’t know of any insurance company or large asset manager, central bank, bank
, treasuries and sovereign wealth funds that do not participate in this market to some degree. You’ll even see SSA in corporate balance sheets, because for a safe part of your portfolio, you get an attractive return. Therefore, historically, it’s geared towards that professional investor, particularly those who are a little bit more conservative, or for the conservative portion of their portfolios.
FP: What are some things those interested in these bonds/markets should consider?
RY: The SSA market’s very vast, so there’s SSA issuers from many jurisdictions and some jurisdictions people will be less comfortable with than others. There are some that are based in, and are very much, Latin American focused, for example. For someone who is less comfortable with that region for whatever reason, they may choose not to do that. But having said that, an issuer operating in a region may have support and ownership outside of that region too. Therefore, I would say to any investor, understand your investment. You’ll still have to do your homework, even if it’s got three A’s that are attached to it. Some people will be more tuned into the mission or the purpose of any given SSA borrower versus the other. For some it will be the owner(s). And so there’s lots to choose from. Not all SSA borrowers are made equal, and so you have to find what works best for you and your risk tolerance.
FP: You mention the mission. Do you expect this market to grow as we see increased interest in socially conscious investing?
RY: I think it’ll continue to grow and evolve. If you look at a number of the programs and some of the newer borrowers that are coming online, their programs are looking like they’re going to get bigger, not smaller. I believe that people will start to seek out more of the investments that have more social good, more social benefit, especially after Covid highlighted some of the differences between the haves and have-nots. And as international and geopolitical affairs get a little trickier, the Supranational community, in particular, provides a way to be a little bit more objective and/or agnostic when nations work together. If you look at some of the global conflicts that are happening around the world, there are going to be countries, regions, and territories that are going to need to be rebuilt. Whether it’s a war or Covid, there’s no shortage of infrastructure required going forward.
FP: If part of the reason why people like SSA is the social aspect, how can they know if these SSA issues/bonds do what they’re promising, especially given some of the skepticism around EGSs and greenwashing?
RY: ESG is a simple but abstract concept, and I think we have to acknowledge the fact that not everybody’s got it right. There’s a lot of ESG that’s in the eye of the beholder – what is green to me, or what is social to me, might be somewhat different to you. While there is a lot of work to harmonize standards and taxonomies, in the interim I will say that the SSA community is incredibly transparent – it’s in their mandate to operate that way. All of their websites have a host of data, including how they are approaching ESG. Therefore, there is a lot of information about their principles that they’re working towards in ESG, and you can choose if you like them or not. Also, remember that most of these entities are actually set up as special-purpose financial institutions, so they’re also heavily regulated within either the jurisdiction in which they come from, or across the jurisdictions. And so there’s an added layer of transparency that is being pushed on them by regulators and the listing authorities.
FP: What’s the outlook for the SSA market and SSA bonds in 2024?This is