Europe’s One-Time Bond Market Pariahs Now Locked in Race to 0%
Europe’s One-Time Bond Market Pariahs Now Locked in Race to 0%
(Bloomberg) -- Less than a decade ago, when Portugal stood at the brink of bankruptcy, its bond rate jumped above 18%. This week it yielded next to nothing.
The rate dropped to as low as 0.001%, threatening to become the first 10-year bond in Europe’s periphery to break a key psychological barrier, despite the nation’s near-junk credit rating.
The bonds of Spain, Italy and Greece -- which, together with Portugal, were the epicenter of Europe’s debt crisis -- aren’t far behind, as the pricing of financial risk diminishes from Europe’s government bond markets. Credit default swaps for sovereign debt in western Europe declined to an all-time low this week, according to Markit data.
Rather than a story of economic resurgence, the compression has largely been a function of the presence of a single, dominant buyer in the market: the European Central Bank. Under President Christine Lagarde, the institution has scooped up an ever-growing pile of government debt to help prop up the region’s economies during the pandemic.
“All hail Queen Lagarde,” said Richard Hodges, a money manager at Nomura Asset Management. “Everyone is buying into lower rates for longer, and longer is forever. Why do we think it will stop here? It won’t.”
With the ECB expected to boost its pandemic bond-buying program next month, investors’ demand for debt has been relentless. Italian bonds rose on Thursday even after a top aide to the Prime Minister said the ECB should consider wiping out or holding the government debt it buys during the current crisis forever.
Glossing Over Risks
One side effect of the hunt for yield amid central bank stimulus is that it helps gloss over political and financial risks in the region. While a break up of the euro area bloc is remote, especially given plans for a landmark cross-border recovery fund, there are still issues surrounding populism and debt-loads.
Italy, for example, is set to see its debt as a proportion of the economy rise toward 160% this year. Portugal’s is projected to increase to about 135% in 2020 on virus-related borrowing. It was around 129% in 2012, the year its benchmark bond yields jumped to a record. Both nations are rated Baa3 by Moody’s Investors Service, one level above junk.
Despite record bond sales, with Italy selling over 100 billion euros ($120 billion) of medium-to-long term bonds more than planned this year, and Portugal raising 50% more than forecast, there’s been no sign of indigestion from investors. Italy racked up 108 billion euros of orders for a 14-billion-euro debt sale in June, while Portugal set its own record for a syndication the following month.
“Zero percent has turned out to be just a number,” said Piet Christiansen, chief analyst at Danske Bank AS. “One can say the same regarding most, if not all European government bonds now.”
The hunt for yield is helping to swell the pile of negative yielding debt worldwide. This month, it climbed to an all-time high of $17.5 trillion, according a Bloomberg gauge. The yield on Spain’s benchmark securities are about six basis points from joining that index, while those of Italy and Greece are roughly 60 basis points away.
Next Week:
Euro-area bond sales are due to slow next week with only German and French auctions totaling 8.5 billion euros, compared to more than 11 billion euros this week. There are no bond redemptions and only small coupon payments from Italy and Spain next week.
- The U.K. will offer 9 billion pounds ($12 billion) of conventional and inflation-linked debt across four sales next week and the BOE will buy back 4.4 billion pounds of debt across three operations
- Data for the coming week in the euro area is led by inflation numbers
- Euro area inflation figures for November are set for Tuesday, which also brings final manufacturing PMIs; final services PMIs are due Thursday
- U.K. investors see mostly second tier data alongside final manufacturing and services PMIs on Tuesday and Thursday respectively
- Policy makers:
- Lagarde makes appearances on Monday and Tuesday, affording her the final opportunity to fine tune her message ahead of the following week’s monetary policy decision
- BOE‘s Silvana Tenreyro, who this week said targeted fiscal policies to support the economic recovery are the best option, speaks again on Monday and Friday; Jonathan Haskel speaks on Tuesday and Michael Saunders rounds off the week with a speech on Friday
- Fitch Ratings reviews Italy and DBRS Ltd. reviews Germany on Friday
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