Europe’s Half-Century Bond Bonanza Runs Up Against Weak Demand
A lock seals the door of a closed business in Madrid. (Photographer: Paul Hanna/Bloomberg)

Europe’s Half-Century Bond Bonanza Runs Up Against Weak Demand

The window for Europe to sell its longest dated debt may be closing faster than countries expect.

Demand for Britain’s longest-dated gilt fell to the lowest level since July 2018 at auction on Tuesday, with bids for the bond maturing in 2071 coming in at more than two times the 1 billion pounds ($1.38 billion) on offer. Austria and Spain both saw orderbooks fall for sales of 50-year and 15-year debt respectively.

It’s a sign that the region’s bond markets are being hit by a double whammy of heavy supply and fears of a reflationary resurgence, which threatens to erode returns for investors. Nordea Bank Abp warned that the window to sell long-dated tenors is now closing as the economy recovers against a backdrop of an accelerating vaccine rollout. That could put pressure on the European Central Bank to dial back its bond purchase programs.

“The odds are stacked against longer-dated supply being taken down well,” said Peter Chatwell, head of multi-asset strategy at Mizuho International Plc. “There is no likely outcome where long end rates are able to sustain a bid.”

Europe’s Half-Century Bond Bonanza Runs Up Against Weak Demand

Around 15% of debt sales in the region during the first quarter had maturities of 25 years or more -- an all-time high, according Nordea -- as countries took advantage of the ECB’s bond-buying program to borrow at near record-low rates. But now, government bond yields have rebounded from all-time lows as investors begin to price an end to the pandemic.

“It may become trickier later this year, as the economic recovery materializes and an environment of higher yields may start to look less remote,” Nordea’s chief strategist Jan von Gerich said, adding that the worst of the selling pressure in bonds appears to be over for now.

Spain saw orderbooks drop by around 20 billion euros for a six billion euro debt sale, while in Austria, demand for its 50-year sale fell by around one billion euros, even with only 2 billion euros on offer. Its four-year sale did better, garnering above 26.6 billion euros of bids, around six times more than the amount being sold.

One overwhelming force keeping a lid on yields is the ECB’s repeated pledge to keep monetary policy accommodative as the region shakes off economic pain from the pandemic. Data scheduled for Friday is expected to show euro-area consumer price inflation jumped to 1.3% last month, the highest in more than a year. Yet that would still be below the central bank’s goal of a reading close to, but below 2%.

“I don’t sense a shift in attitude towards duration based on the better economic outlook, not yet at least,” said Antoine Bouvet, senior rates strategist at ING Groep NV. “The lower-for-longer narrative is still widely shared in Europe.”

Austrian securities that come due in 2062 yield around 0.66%, up from around 0.10% in December. Fifty-year gilts currently yield around 1.12%, having climbed from less than 0.3% last year. That’s well below a market gauge of expected price rises over the next decade, which hit 3.83% this month, the highest level in more than a decade.

©2021 Bloomberg L.P.

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