Bond-Guzzling ECB Will Shield the Market From Next Debt Tsunami

(Bloomberg) -- European bond investors are looking to the region’s central bank to absorb a glut of sovereign debt heading to the markets in 2021.

Bond issuance by euro-area nations may total 1.25 trillion euros ($1.5 trillion) next year as they fight the fallout from the pandemic, on par with the record levels reached in 2020, according to ING Groep NV. In addition, the European Union itself is set to be a leading issuer, with a landmark stimulus plan that will be financed by jointly-issued debt.

In normal times, such a flood of sales would bolster yields. But banks from ING to JPMorgan Chase & Co. and Societe Generale SA are sanguine about the impact on markets, expecting the issuance to be more than offset by the European Central Bank’s multi-trillion-euro asset-purchase program. Just this month, the institution boosted its emergency debt-buying program by 37% to 1.85 trillion euros.

“ECB purchases of euro-area bonds next year could exceed net issuance by almost 60%,” said Eric Oynoyan, a strategist at BNP Paribas SA, who estimates next year’s total issuance at 1.1 trillion euros, about 6% lower than in 2020. “It should contribute to partly offsetting the negative impact for bond yields of stronger growth and inflation in 2021,” he added.

The institution’s debt buying will help contain the German 10-year yield, the region’s benchmark, in range between minus 0.2% and minus 0.5% next year, according to BNP. The rate was around minus 0.57% on Wednesday. ECB purchases will exceed euro-area issuance -- after adjusting for redemptions -- by 240 billion euros, ING estimates.

Unwavering central-bank support should curb bond-market volatility and cap government borrowing costs in the euro zone, allowing efforts to revive the economy to progress unhampered. While the ECB isn’t the only monetary authority globally to pursue the policy of asset purchases known as quantitative easing, other central banks are seen intervening less in markets next year.

ECB debt buying isn’t without its complications. As the central bank hoovers up unprecedented amounts of securities from the market, other investors are getting squeezed out. The institution is set to own around 43% of Germany’s sovereign bond market by the end of next year and around two-fifths of Italian notes, according to Bloomberg Intelligence. That’s up from around 30% and 25% respectively at the end of 2019.

More Syndications

A lot of that buying may happen in January. That may be the busiest month of the year for debt issuance, with around 175 billion euros in sales including those tied to the EU’s job support program, according to Societe Generale.

Euro-zone debt agencies will likely issue more longer-maturity bonds in 2021 as they look to lock in lower borrowing costs for longer and a lot of sales may be conducted through banks, according to strategists. Such offerings, known as syndications, are more expensive than auctions, but they allow governments to raise very large sums quickly while diversifying their investor base.

“We expect a lot of competing supply, with many 10-year syndicated deals, as well as the EU resuming SURE issuance for around 10 billion euros,” strategists at Societe Generale including Jorge Garayo wrote in a note. “France may bring a new 50-year, and we expect this and a 15-year” Italian note “to be the first tests of demand for long paper,” they wrote. The EU’s SURE program is a temporary measure designed to help governments keep workers in jobs.

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Ireland and Portugal are often the first out of the blocks with syndicated sales and 2021 should be no different, according to Garayo, who expects Germany, France, Italy, Spain, Belgium and Austria to follow. This way of issuing debt proved popular with European governments this year as they borrowed unprecedented amounts to fight the pandemic.

Green Debt

Environmental bonds are also set to make a bigger splash next year with Italy and Spain’s inaugural green notes joining the likes of France, which has said it will offer more of the securities.

The EU itself plans to sell 225 billion euros of such assets next year, which will make it the world’s largest issuer of debt used to finance environmentally friendly projects. The bloc -- which is ranked AAA by the ratings agencies -- will also be a major player in conventional debt as it taps investors for its pandemic recovery fund.

That has led to some market speculation that a surge in EU debt supply could crowd out other top-rated issuers such as Germany and the Netherlands. But Elvira Eurlings, director of the Dutch State Treasury Agency, sees no cause for concern.

“Appetite for AAA paper is enormous and supply is way below demand,” she said in an interview with Bloomberg.

After the EU, one of the biggest issuers in the region will be Germany, which plans to sell a record $576 billion of securities in 2021. Still, after excluding bills and adjusting for redemptions, the nation’s bond sales are seen at 86.5 billion euros, which should be dwarfed by ECB purchases, according to Richard McGuire, head of rates strategy at Rabobank.

“These calculations clearly show the scale of the ECB’s interventions and the fact that the notion of a pandemic-induced increase in supply being bearish for core bonds does not stand up to scrutiny,” he said.

Next Week

Euro-area bond issuance and ECB buying are set to resume in the first week of January with Germany, France and Spain all selling debt. Ireland and Portugal are expected to offer securities through banks, according to Danske Bank A/S.

• The U.K. will sell 10-year bonds and the Bank of England will buy back 4.4 billion pounds ($6 billion) of debt across three operations next week
• The data schedule for the coming week is led by German and euro-area inflation numbers for December, on Wednesday and Thursday respectively. Final manufacturing and services PMI figures for the pair on Monday and Wednesday are expected to confirm initial readings
  • The U.K.’s data calendar is mostly second-tier and backward-looking with final manufacturing and services PMI numbers, due on Monday and Wednesday respectively, forecast to match flash estimates
• There are no ECB policy maker speeches scheduled for next week so far
  • BOE Governor Andrew Bailey speaks in Parliament on Wednesday about December’s Financial Stability report
• There are no notable sovereign rating reviews next week

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