It is one of the great ironies of the European bond market that one of the largest market distortions occurs within the sovereign sector and are caused by the direct actions of Europe’s sovereign debt managers. The regulatory environment in Europe is tighter than ever, with the EU taking an aggressive and sometimes misguided stance in its aim of eliminating distortions in the capital markets, notably with its Market Abuse Directive and MiFID. And yet, despite all the EU’s talk of market efficiency, it ignores the market abuse happening right under its nose.
By using the promise of winning syndicated bonds as a carrot/stick, sovereign debt managers across the continent are able to demand that their primary dealers outperform at auctions and provide liquidity on both on- and off-the-run government bonds. An increasing proportion of sovereign debt is sold via syndication – up from €70 billion in 2000 to €158 billion so far this year. European government bond mandates are essential to investment banks that want to maintain a serious fixed income franchise.
Off the record – they can’t be quoted, they’ll lose those all-important mandates – bankers say that many of Europe’s debt management offices are abusing their power over their primary dealers to keep costs of issuance down.