1. Non-US Supranational Panel
Margaret Kerins, CFA
Head of Fixed Income Strategy
Dan Krieter, CFA
November 7, 2018

3. USD SSA Market Grows While GSEs Shrink
SSA Strategy
USD SSA Market Grows While GSEs Shrink
USD Non-DN Debt Outstanding ($ bn)
US agency non-DN outstandings have shrunk by over $800 bn since 2008, or by 40%.
The USD SSA market has grown to 77% of the non-DN US agency market, compared to 23% in 2008.
Net Issuance since the financial crisis
US Agency: -$841 bn
USD SSA: $569 bn
USD Net Non-DN Debt Issuance ($ bn)
Source: FNMA, FHLMC, FHLB, FFCB, Bloomberg

4. Agency Issuance Declining
SSA Strategy
Agency Issuance Declining
FHLB and FFCB now the dominant issuers in the agency market
DN and floater issuance has increased while the bullet and callable markets shrink at all four GSEs
Bullet issuance difficult to find in the agency market. Likely diversification needs as FHLB and FFCB represent the best way to add term debt.
2015 Net Agy Issuance ($ bn)
2015 Net Agy Issuance ($ bn)
Source: FNMA, FHLMC, FHLB, FFCB

5. Reform: Decline the Only Certainty
SSA Strategy
Reform: Decline the Only Certainty
FNMA and FHLMC expected to continue shrinking until $250 bn floor is reached in 2018.
Debt used to fund retained mortgage portfolios will not be a feature of whatever shape housing finance reform takes.
Bottom Line: Under every regulation bill yet introduced to Congress, FNMA and FHLMC are wound down over a five year period, after which all remaining debt is explicitly guaranteed.
2015 Net Non-DN Agy Issuance ($ bn)
Source: FNMA, FHLMC

6. What Is the Most Logical Replacement for Agency Debt?
SSA Strategy
What Is the Most Logical Replacement for Agency Debt?
MBS? Prepayment/Extension risk; Uncertainty over mortgage market reform.
Corporates? Credit and liquidity risk
High Quality Market
Supranational – International organization whose mandate extends across national boundaries e.g. IBRD (World Bank), EIB (European Investment Bank), AfDB (African Development Bank). Typically backed by paid-in and callable capital of member countries.
Sub-Sovereign – Public debt at a sub-national level e.g. Canadian Provinces.
Non-US Agency – Public and private entity that typically functions for a social or public need e.g. KfW (Kreditanstalt für Wiederaufbau), EDC (Export Development Bank of Canada).

7. SSA Strategy SSA Analysis Checklist Purpose Parent Country/Countries
Key Factors of SSA Debt
SSA Analysis Checklist
Purpose
Parent Country/Countries
Guarantee Structure from Parent (Explicit, Maintenance, Implicit)
Rating (and Dependency of Rating on Parent)
Regulatory Risk Weighting
Size of USD Borrowing Program
Trading Spread

8. BMO SSA Cheat Sheet a Good Resource
SSA Strategy
BMO SSA Cheat Sheet a Good Resource

9. Overview of USD SSA Market
SSA Strategy
Overview of USD SSA Market
USD SSA Issuance ($ bn)
In 2015, USD SSA issuance totaled $217 bn, down slightly from 2014.
2016 supply likely similar to 2015
On average ~75% of SSA deals are benchmark-sized (>=$1 bn).
$37 bn in MTN supply in 2015.
Global vs. 144a/RegS format.
KfW/EIB/IBRD represent ~30% of total USD SSA supply
USD SSA Issuance ($ bn)

10. % of New Issues Bought by Banks (%)
SSA Strategy
Who Buys USD SSA Debt?
On average, banks and central banks purchase almost 80% of new USD SSA issues.
Central banks: ~50% of SSA debt purchased. Focus on the safety of FX reserves
Banks: Increased from 10% to 35% of SSA purchases due to favorable regulatory capital treatment
Distribution of Post-Crisis New Issue SSA Deals (%)
% of New Issues Bought by Banks (%)
Source: Informa, BMO Capital Markets

11. SAFETY: Supranationals the Safest Option in the SSA Market
SSA Strategy
SAFETY: Supranationals the Safest Option in the SSA Market
Within the SSA market, supranationals have the strongest credit quality
Preferred Creditor Status
Backed by Paid-in and Callable Capital from member countries
World Bank Loans and Available Capital
Source: IBRD Investor Presentation

12. Source: TradeWeb, , Bloomberg, BMO Capital Markets
SSA Strategy
LIQUIDITY: Supranational the Most Liquid Option in the SSA Market
Most SSA debt is not TRACE eligible, making liquidity measurements difficult.
Market Efficiency Coefficient (MEC) is a measure of liquidity, and SSA debt is closing the gap on agencies.
Supranationals trade similar to TSY/Agy. Agencies trade more like corporates.
MEC Over the Past 5 Years
Source: TradeWeb, , Bloomberg, BMO Capital Markets

13. Source: TradeWeb, , Bloomberg, BMO Capital Markets
SSA Strategy
LIQUIDITY: SSA Liquidity Improving in Normal Market Conditions
Average Bid/Ask spread equal to US agency debt (~3.5 bp).
SSA bid/ask spreads roughly equivalent to agencies in normal times, but still vulnerable to drops in stressed market environments.
Included in major US fixed income indices (Barc, Citi, BAML).
SSA Bid/Ask Spread Relative to US Agencies(bp)
Source: TradeWeb, , Bloomberg, BMO Capital Markets

14. RETURN: How Do SSAs Trade Compared to Agencies?
SSA Strategy
RETURN: How Do SSAs Trade Compared to Agencies?
3yr Spread to Treasuries
3yr SSA Spreads to Agencies
Source: TradeWeb, BMO Capital Markets

15. Source: TradeWeb, , Bloomberg, BMO Capital Markets
SSA Strategy
SSA Borrowers at the Forefront of Socially Responsible Investing
SSA borrowers were the very first issuers in the green bond market.
In 2015, 40% of green bond issuance came from SSA borrowers.
2016 issuance may approach $75 bn following Paris climate accord.
SSA institutions are experts in the green bond space, with green frameworks and reporting standards greatly exceeding the standards of other borrowers.
Green Bond Issuance ($ bn)
Number of Socially Responsible Mutual Funds
Source: TradeWeb, , Bloomberg, BMO Capital Markets

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