Europe Plays It Safe to Ensure Bond Binge Doesn’t Break Markets

(Bloomberg) -- European governments are taking no chances as they tackle the challenge of borrowing record amounts of money to fund coronavirus relief efforts.

National treasuries are increasingly turning to bond syndications -- a way of selling debt that guarantees the target amount will be raised, albeit at a higher price than a conventional auction. Italy racked up record demand at one such offering in the last week and the U.K. is set to follow suit next week, while Germany also may be lining up a sale.

JPMorgan Chase & Co. estimates that around 30% of this year’s government debt issuance -- equivalent to about 175 billion euros ($198 billion) -- was through syndications, where a group of banks underwrite the offering, all but guaranteeing that the target amount gets sold. That’s around a third more than what’s normal for the time of year.

“Euro-area sovereigns have actively used syndicated deals to raise large amounts quickly,” JPMorgan strategists led by Fabio Bassi wrote in a note to clients. “We expect ongoing opportunistic syndicated supply to continue in June.”

Austria became the latest nation to announce record borrowing plans for 2020, nearly doubling its initial estimate for the year to about 60 billion euros. Still, investors have so far remained unfazed, with the European Central Bank set to pump trillions of euros into the region’s government bonds.

The ECB announced a 600-billion-euro increase to its pandemic bond-buying program Thursday, boosting the total amount to 1.35 trillion euros. That spurred a rally in Italian bonds, while the euro also notched up its longest daily winning streak since 2011.

Debt Sales

Euro-area bond auctions are set to fall further next week with offerings from Germany, Italy, Netherlands, Ireland and Portugal totaling around 15 billion euros, less than half the weekly average since mid-March, according to Commerzbank AG. The bank also expects Germany to sell a 30-year note via syndication, raising 5 billion euros.

• Germany pays 12 billion euros of redemptions next week; there are no coupons payable
• The U.K. will offer over 7 billion pounds of debt across three sales of conventional as well as inflation-linked debt next week; the debt management office will also sell a 30-year note via syndication
  • The BOE will maintain its bond-buying program across nine operations at a pace of 1.5 billion pounds per maturity bucket
• Data for the coming week in the euro area, Germany and U.K. is mostly relegated to second-tier, backward-looking figures; all three will publish April industrial production figures
  • U.K. growth in April is forecast to drop the most since records began
• ECB President Christine Lagarde headlines policy maker speeches next week when she attends a European Parliament hearing. Olli Rehn, Isabel Schnabel and Luis de Guindos are also scheduled to speak
• DBRS Ltd. reviews the United Kingdom’s sovereign rating, Fitch Ratings reviews Germany and Spain on Friday

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