Europe’s Debt Binge Is No Concern for Yield-Starved Investors


The insatiable hunt for yield will help snap up Europe’s latest wave of debt sales.

After Italy, Ireland and Slovenia racked up almost $200 billion of orders in their first syndicated bonds issues of the year, governments in the region including France and Belgium are slated to tap the market for another 30 billion euros ($36.8 billion) next week, according to Danske Bank A/S.

The offerings are likely to go down smoothly thanks largely to the European Central Bank’s bond-buying backstop and liquidity injections. A near-record 3.5 trillion euros of spare cash is now sloshing around the economy, and it’s encouraging investors to pile on sovereign debt holdings, even as governments borrow and spend more to shield their economies.

Europe’s Debt Binge Is No Concern for Yield-Starved Investors

“The expectation of significant fiscal stimulus, further supply of U.S. Treasuries and potentially higher rates has not rattled the market,” wrote Jens Peter Sorensen, chief analyst at Danske Bank. “With the significant excess liquidity and negative rates, investors are ‘chasing yield’.”

He expects France and Belgium to sell 50- and 10-year bonds respectively next week through banks. While that’s more expensive than auctions, it allows governments to raise very large sums quickly while diversifying their investor base.

Euro-area governments will raise over 1 trillion euros of debt this year, according to ING Groep NV. The ECB’s 1.85 trillion euro emergency bond-buying program is more than sufficient to buy it up even after accounting for redemptions, according to banks including JPMorgan Chase & Co.

Longer Bid

Adding to the buoyant demand for the securities is the growing pile of negative-yielding debt in Europe, which is pushing investors looking to escape sub-zero rates further out the yield curve. Citigroup Inc. strategists including Aman Bansal expect issuance of maturities longer than 15 years to make up a quarter of all sales in 2021, a similar level to last year.

There’s also a seasonal pattern that tends to explain the strong appetite for debt in the euro-area as the year kicks off, according to BofA Global Research strategists including Sphia Salim. “Together with higher issuance activity, investors also tend to be particularly active in asset allocation during the first phases of the year,” they said.

A sale of French 30-year debt was oversubscribed by the most since August last week, while demand for its Spanish peer rose to the highest since 2019 as investors chased yield. Italy’s sale of 10-year bonds meanwhile racked up orders in excess of 105 billion euros, falling just short of a record set in June.

Next Week

  • Euro area bond issuance could fall by around 18 billion euros to 32 billion euros next week according to Commerzbank AG if scheduled auctions from Germany, Italy, Netherlands, Portugal and Austria are joined by syndicated sales from Spain and Belgium; there are no bond redemptions and only small coupon payments are scheduled from Italy and the Netherlands next week
    • In the U.K., the Debt Management Office will sell just over 4.5 billion pounds of two conventional and one inflation-linked bonds and the Bank of England will buy back 4.4 billion pounds of debt in three operations
  • Data for the coming week in the euro area and Germany is thin and mostly backward-looking, with the exception of the euro area Sentix investor confidence numbers for January on Monday
    • U.K. data also offers slim pickings; November GDP is due on Friday
  • ECB policy maker speeches are scheduled from President Christine Lagarde and Bostjan Vasle on Monday followed by Pablo Hernandez de Cos who speaks on Tuesday and Thursday. Francois Villeroy speaks on Wednesday when Lagarde makes another speech. The ECB then enters a quiet period ahead of the rate decision on Jan. 21
  • BOE policy maker Silvana Tenreyro’s speech Monday on negative interest rates will be closely watched for clues on the prospect for sub-zero rates; Ben Broadbent will talk about Covid and the composition of spending on Tuesday
  • Fitch Ratings reviews the U.K. and Moody’s Investors Service reviews Finland on Friday

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