Global Bonds Plunge Ahead of Debt Deluge From Pandemic Defense
Some $1.14 trillion in fiscal support has been pledged as governments around the world rush to contain the coronavirus.
(Bloomberg) --
European sovereign bonds led a global rout, with markets bracing for the kind of supply surge not seen for years, after nations unveiled spending plans of more than $1 trillion to fight the coronavirus crisis.
Dramatic jumps in yields amounted to a wide and deep re-pricing of the market, with investors selling debt across the board. Italian 10-year yields jumped as much as 64 basis points, before easing marginally on speculation the European Central Bank is buying the nation’s debt.
Rates on German 30-year debt surged to pop back above 0%, and those on 10-year U.S. Treasuries extended their advance during London trading after clocking up the biggest jump since 1982 on Tuesday.
At the same time, there was sustained demand for the dollar, with the Bloomberg index tracking the world’s reserve currency up for a seventh straight session, its longest rising streak since November. The premium for getting hold of the greenback in funding markets eased after euro-area banks took $112 billion made available by the U.S. Federal Reserve on Wednesday in operations coordinated by the ECB.
Some $1.14 trillion in fiscal support has been pledged or is under consideration as governments around the world rush to contain the coronavirus and shore up financial markets and businesses. Pledges by Germany and France to guarantee hundreds of billions in bank loans boosted the global tally.
“Given the massive fiscal stimulus, rates have to go,” said Jens Peter Sorensen, chief analyst at Danske Bank A/S. “It goes for Treasuries, BTPs, bunds, Spain, France, you name it.”
While it isn’t surprising that the debt of nations deemed more vulnerable to the outbreak have taken a hit, it’s striking that bond spreads are widening when even the benchmark -- German yields -- is rising. Bund yields rose for a seventh day in a sell-off reminiscent of the 2015 “tantrum.”
“This is hard to rationalize given one would tend to think that risk aversion should operate as a zero-sum game wherein safe havens such as bunds are the beneficiaries,” Rabobank strategists including Richard McGuire wrote in a note. “Investors appear to be pricing in a sizable budgetary deterioration throughout the euro area.”
Rabobank noted that even in previous times of trouble, such as the dot-com bubble and the euro-zone crisis, bunds rallied due to the consequential haven demand -- unlike now.
“It potentially speaks to the gravity of the situation prompting investors to take a much more narrow definition of what is safe,” the strategists said, adding poor liquidity could also be interfering with the market’s signals.
Still, if Germany does join an issuance bonanza, bunds are likely to remain in relative demand, keeping a lid on any yield spike. They’re still outperforming their French and British peers, while the yield premium on peripheral European debt has rocketed.
“The demand for high-quality, liquid assets caps a yield increase, as does the excellent debt situation compared to other euro-area countries,” said Andreas Schubert, a money manager at Warburg Invest in Hamburg.
A Little Comfort
Across the continent, other economies aren’t so sheltered.
Italian bond yields, the biggest gainers on Wednesday, pared their advance to about 30 basis points after ECB Executive Board member Isabel Schnabel signaled the bank is in the market to stabilize the nation’s debt.
She said the central bank should intervene “if monetary policy transmission is at risk” and “that’s exactly what we’ve been doing intensively since last Thursday. Our bond purchases have a stabilizing effect on the market.”
The nation issued 3 billion euros of so-called BTPs in exchange for bonds due in July 2022. Meanwhile, the yield on Greece’s 10-year notes soared above 4% for the first time in more than a year.
Martin Enlund, chief analyst at Nordea Bank Abp, sees “rising sovereign risks.” This raises the prospect of joint European Union debt issuance, something which remained a taboo for Germany even at the height of the 2008 financial crisis, yet now Chancellor Angela Merkel has hinted she may be open to it.
“While Italy and others will be allowed to formally go to the market to borrow more funds by the EU, will these economies ever be able to recover once the crisis is over under current rules? Maybe, maybe not,” Enlund said. “Full Eurobonds, a proper fiscal union, or a fiscal union through the back-door via massive ECB shenanigans might turn out to be needed at some point not too far into the future.”
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