Abstract: The epidemic has forced countries to adopt different ways of thinking in response to the worst recession since the Second World War.

The epidemic has forced countries to adopt different ways of thinking in response to the worst recession since the Second World War. As countries are eager to meet their financing needs, many countries (especially in Europe) are reluctant to take any risks because they worry that oversupply will cause interest costs to spiral upward. This has led to a less-expensive approach in Europe, namely the issuance of bonds through syndicates, which is a relatively high-cost but easily predictable option.

1. In what ways does Europe do something different?

In Europe, the typical way to raise funds is through auctions-think about Sotheby's-that is, a country sells a certain amount of debt at a specific time on a certain day. Just like art auctions, investors bid, and prices fluctuate according to demand. Less common is private placement, where debt management agencies sell bonds directly to investors, usually for more ambiguous issuances, such as 100-year Irish bonds. Another way is through syndication, which is to designate a group of banks to underwrite a sale. Syndicates are used to a large extent to introduce new or ultra-long bonds to the market, and have become a popular choice for funding outbreak plans. They cost more, but they are guaranteed to raise funds.

2. How do they work?

After the Ministry of Finance of a country has solved the borrowing needs, its debt management office usually plans how to raise funds for it through auctions and syndicates. The latter involves finding a group of banks that will be responsible for ensuring the safety of investors and agreeing to purchase any unsold securities. If you know that all of your bonds can be sold, you have to pay an extra price for it. The most recent Italian syndicated order received more than 100 billion euros (US$113 billion), mainly because the yield of these bonds is nearly 10 basis points higher than the bonds on the market. Assuming that the bank manages to sell all products, this process is a very profitable process for the bank.

3. Why should Europe do this?

Europe faces unprecedented demand for loans. According to data from Bloomberg, total bond sales in the 19-nation euro zone will reach about 1.2 trillion euros this year, up from about 870 billion euros in 2019. And because countries are still deregulating, governments cannot afford the much-needed support for businesses and citizens. Regular auctions may be unreliable and may not be able to sell all the bonds provided, so syndicated issuance is required. JPMorgan Chase & Co. estimates that they account for about 30% of government bond issuance this year, a third increase from the same period last year.

4. Can investors digest all excess borrowing?

Now it seems they can and can buy more. Sales in the region attracted record demand, thanks in large part to the European Central Bank. Although the agency cannot buy bonds directly from US Treasury bonds, its growing share of the secondary market means investors know they can sell securities at any time. At the June meeting, the European Central Bank increased its purchase plan to deal with the outbreak to 1.35 trillion euros. Of course, this does not guarantee that the syndicate will continue to meet strong demand. For example, the spread of the second wave of outbreaks may make such sales more challenging for debt-ridden countries such as Italy.

5. How does this compare with the rest of the world?

Corporations often use syndicates to sell bonds, and emerging market countries, regional governments and development funds also often use syndicates. However, the largest bond seller in the world, the United States, has never used syndicates. Although the U.S. Treasury has considered syndicates on the basis of the success of other countries, there are also concerns that this may favor the predictability of some banks and disrupt market supply. Importantly, there is actually no such need: US Treasury's position as the world's largest and most liquid government bond market supports demand, including demand from foreign investors.

6. Does it have a wider impact on the bond market?

The syndicate is now working. Even in the United Kingdom, Spain, Ireland, and Greece, where such sales have been made, investors have prepared nearly $300 billion in takeover offers, showing that demand for fixed-income products remains strong. As the central bank absorbs so much supply, there may be long-term risks in market operations. The Bank of Japan has been buying bonds in large quantities, so that there are no bond transactions on the open market for a few days. If Europe follows the same path, more daily work in the interest rate department may be to conduct profitable syndicated activities rather than actually buying and selling securities. The danger is that liquidity is almost exhausted.