The World Bank today issued the first ever Special Drawing Rights (SDR) bond via the China Interbank Bond Market (CIBM). The AAA rated 3-year SDR 500m (USD 700m) note underwritten by the International Bank for Reconstruction and Development (IBRD) will settle in renminbi (RMB) on September 2.
Initial price guidance was set at a yield of 0.4-0.7%, so more attractive than the likes of AAA rated 3-year Bunds yielding negative 0.65%. Using our proprietary Relative Value Model and workings using the SDR currency weightings, in terms of “fair value” the initial yield guidance at the high-end of 0.7% looked about right. As it was the first SDR bond to be issued in over 35 years, demand outstripped supply and the bond was issued at only 0.49%; well below the yield offered by similar IBRD bonds issued in RMB. For example, the RMB 3.48% 2018 issue, also rated AAA, is currently trading at a yield above 3%. Despite the lower yield, the People’s Bank of China (PBoC) say the issue was almost 2.5 times oversubscribed.
With the Chinese renminbi set to join the SDR basket, at a higher weighting than the sterling and Japanese yen, on October 1 we may see a number of institutions seeking approval to issue SDR bonds on the CIBM. We do not expect that the SDR or SDR bonds will become mainstream in the near term, in fact today’s issue attracted orders from only ~50 investors, according to the PBoC.
However in the longer term, replacing the US dollar with a basket currency like the SDR would have major benefits to the world economy. At present many countries have unhedged liabilities in US dollars and they would be less exposed to currency fluctuations if their borrowings were in SDRs. The concept is not new and the idea of a supranational currency was proposed by Keynes in the 1940s under a basket currency called Bancor. 75 years later Keynes’s idea still hasn't been internationally accepted, but with debt levels still rising around the world, maybe it's time to try a different approach?