Spare Cash Spurs Record Demand for Debt as Funds Vie With ECB

(Bloomberg) -- There’s so much cash in Europe there are just not enough bonds to go around.

The amount of spare liquidity in the euro-area economy hit an all-time high of 3.2 trillion euros ($3.8 trillion) this month and plenty of that is chasing any new debt issue. This was seen in the record 233 billion euros of orders for the European Union’s debut social bonds.

In the next week, regular sales from the likes of Germany and Italy will total just over 12 billion euros, and that should easily be mopped up simply by reinvestments from large redemption and interest payments of over 50 billion euros in the same period.

The exponential growth in orderbooks has been a theme of 2020, driven by the difficulty of buying in large volumes in the secondary market, and then investors trying to make up for the disappointment of previous orders not being filled, according to Richard McGuire, head of rates strategy at Rabobank.

Funds are having to compete with the firepower of bond buying by the European Central Bank. It’s expected by markets to maintain its quantitative easing at a meeting on Thursday, before expanding it by the end of the year, with most of the debate over which program it will use.

The majority of economists in a Bloomberg survey expect an announcement that the pandemic bond-buying program will be increased by 500 billion euros to 1.85 trillion euros in December, alongside a six-month extension to the end of next year.

That means no let-up to the demand pressure for EU debt, which was also seen in surprise sales of Italian and Greek debt in the past week. Benchmark yields for both countries debt have hit all-time lows this month, driving down their premiums against haven German bunds.

Italy Taps Yield Demand to Sell Debt at Tightest Price Since ‘18

“Rising market perceptions that this week’s issuance marks the start for the irreversible establishment of a joint euro safe asset adds weight to the general spread convergence,” said Christoph Rieger, a strategist at Commerbank AG.

Bond Sales

Euro-area bond sales will total around 12.5 billion euros for the week, according to Commerzbank. Italy and Spain will pay more than 51 billion euros in bond redemptions and coupons next week.

The U.K. will hold three regular gilt auctions, selling a total of 6.75 billion pounds and the Bank of England will buy back 4.4 billion pounds of debt in three operations.

• Data next week should give investors a good idea of the state of the region’s economy after the surge in coronavirus cases; euro area and Germany third-quarter growth numbers are due alongside October inflation figures; Germany’s Ifo data for October will also give the outlook for businesses
  • The U.K. data schedule eases next week with only second-tier CBI October sales numbers, home loans and M4 money supply figures
• ECB President Christine Lagarde speaks at a press conference following Thursday’s monetary decision and Francois Villeroy speaks later that day; the central bank publishes its survey of professional forecasters on Friday while Jens Weidmann attends a townhall event on the same day
  • The BOE policy maker slate is light with a publication of an Andy Haldane speech due on Monday
• DBRS Ltd. reviews Italy, Moody’s Investors Service reviews Netherlands and Fitch Ratings reviews Finland on Friday

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