Each year, the OECD circulates a survey on the borrowing needs of member governments. The responses are incorporated into the OECD Sovereign Borrowing Outlook to provide regular updates of trends and developments associated with sovereign borrowing requirements, funding strategies, market infrastructure and debt levels from the perspective of public debt managers. The Outlook makes a policy distinction between funding strategy and borrowing requirements. The central government marketable gross borrowing needs, or requirements, are calculated on the basis of budget deficits and redemptions. The funding strategy entails decisions on how borrowing needs are going to be financed using different instruments (e.g. long-term, short-term, nominal, indexed, etc.) and which distribution channels (auctions, tap, syndication, etc.) are being used.

OECD sovereign issuers continue to face major challenges in the government securities markets as a result of continued strong borrowing operations amid an uncertain environment with elevated borrowing costs in some sovereign debt markets and negative yields in others.

OECD debt managers continue to face huge funding challenges. This chapter provides estimates and projections for 2012 and 2013 of a) government borrowing needs and b) central government debt. Raising large volumes of funds at lowest cost, with acceptable roll-over risk, remains a great challenge, with most OECD debt managers continuing to rebalance the profile of debt portfolios by issuing more long-term instruments and, where possible, moderating bill issuance. Governments’ preferences to enhance fiscal resilience encourage the maintenance of a diversity of nominal and price-indexed instruments along the maturity spectrum.

This chapter deals with the complications for issuers generated by the pressures of perceptions of an increase in sovereign stress, in particular whereby the market suddenly perceives the debt of some sovereigns as risky. The borrowing environment for governments has become even more difficult than before due to the complications generated by sudden shifts in sentiment and perceptions of risk associated with certain sovereigns: the so-called swings in the risk-on and risk-off trades.A lack of consensus on how to measure and price sovereign risk is an important obstacle in assessing sovereign stress. This also complicates assessing changes in the supply of safe public assets. Since the track-record of sovereign risk pricing is not very impressive, suggested market measures of this risk (including ratings) should be treated with great caution. One should, therefore, be very cautious in concluding that the sovereign debt of an OECD country has indeed lost its risk-free or ultra-safe status. Moreover, rating downgrades for several OECD sovereigns and changes in borrowing rates give conflicting signals. This also means that downgrades and their implications for the supply of safe sovereign assets should not be taken at face value but more carefully scrutinised. Concerns over a possible euro area breakup resulted in fragmentation between sovereign funding markets. However, stresses in European sovereign debt markets have been reduced, in part due to important recent policy initiatives such as the announcement by the European Central Bank of its Outright Monetary Transactions (OMTs) programme. As a result, convertibility risk (redenomination risk) associated with fears of a possible euro breakup was diminished.

Serious fiscal vulnerabilities, perceptions of higher sovereign risk and considerable uncertainty about future interest rates have created the conditions for fiscal dominance with new and complex interactions between public debt management (PDM) and monetary policy. This is putting public debt management and the functioning of sovereign debt markets in a macro spotlight.Although PDM alone cannot solve macroeconomic imbalances or address structural financial sector problems, PDM is a key component of a balanced structural policy mix supporting both the proper functioning of government securities markets and, more broadly, the objectives of the macroeconomic framework. The challenges of using unconventional monetary policy instruments for debt management are highlighted. With a further increase of central bank holdings of government securities, a smooth exit from accommodative asset purchase programmes at the appropriate time might become more challenging. The chapter also discusses debt management considerations during periods of fiscal consolidation and fiscal dominance.

Issuance conditions vary among countries. For one group of issuers, the challenge was how to deal with (ultra-)high yields, lower bid-to-cover ratios and greater auction tails reflecting relatively unsuccessful auctions. The second group experienced very strong (flight-to-safety) demand at auctions resulting in negative yields. A third group has no full market access, although different degrees of access can be distinguished when returning to markets. A fourth group had more or less unchanged issuance conditions. The first part of the chapter provides an overview of changes made in issuance procedures and techniques, against the backdrop of changing trends in the composition of the investor base. In response to a more challenging issuance environment, many debt management offices adjusted their issuance procedures (such as more flexible auction calendars, increasing the size of non-competitive subscriptions and greater reliance on syndications) and introduced new types of instruments (like linkers and floaters). Moreover, with the greater role of central banks (foreign and domestic) in government bond markets, maintaining a diversified investor base has become more difficult than before. The second part of the chapter analyses how a more challenging issuance environment has affected both primary dealer systems and the ability of debt managers to distribute their debt to end-investors. This analysis is informed by responses to a survey on the Functioning and Future of Primary Dealer Systems among OECD debt managers. The survey highlights that issuers have introduced wide range of measures to manage the stresses in their markets.

The investor base for government securities has been undergoing important changes, some of them structural. Investment strategies and environments have been changing over the past several years, as global investors have adjusted to crisis related challenges and policies such as quantitative easing, changes in the relative attractiveness or riskiness of developed and emerging market assets, and greater emphasis on individual country risk instead of asset classes. New and demanding challenges were added since 2010 by the unfolding crisis in the Euro area. Moreover, regulatory changes, new or anticipated, with direct and indirect impacts on investment strategies are also having an influence on the investor base for government securities. OECD sovereign issuers attach a greater importance to Investor Relations and the Communication Strategy, citing a variety of reasons, ranging from the need to ensure demand as funding requirements increased and/or circumstances changed, to the need for diversification of the investor base.

This chapter reports on the results from a survey among OECD government debt managers on the use of bond buybacks and exchange operations. The survey shows that government debt managers use extensively bond buybacks and exchanges (often referred to as switches) as liability management tools.Switches and buybacks serve two main purposes. First, by reducing the outstanding amounts of bonds close to maturity, exchanges and buybacks help in reducing roll-over peaks and thus lowering refinancing risk. Second, exchanges and buybacks allow debt managers to increase the issuance of on-the-run securities above and beyond what would otherwise have been possible. The resulting more rapid build-up of new bonds enhances market liquidity of these securities. This in turn should eventually be reflected in higher bond prices. Hence, bond exchanges and buybacks are aimed at lowering refinancing risk. In addition these liability operations may also contribute to lower funding costs for governments.