World Trade

Analysis: Governments in the Eurozone need to find private buyers for their mountains of debt.

Next year, the governments of the Euro Zone will have to convince private buyers to step in and buy an extra 400 billion euros of debt. This will keep the battered bond markets of the bloc under pressure as the European Central Bank continues to pull back on its help.

Since it started quantitative easing (QE) in 2015, the ECB has been a guaranteed buyer of debt. It even bought all the new bonds that governments sold from at least 2019 to 2021. It will now start selling off its holdings.


As governments try to ease the effects of rising energy prices, they need more money. Next year, Germany will sell a record amount of debt. BofA says that in 2023, investors will have to take on twice as much new public debt as they did ten years ago, which was the previous record.

Related: The world worries about a new wave of China’s COVID and thinks about how to help Xi.

This means that issuers will have to work harder to find buyers and risk having to pay more. This is due to the ECB’s unexpectedly hawkish stance last week, which led investors to expect another half-point rate hike next year.

The central bank will still reinvest maturing debt bought during the pandemic, but between March and June, it will sell 15 billion euros’ worth of bonds from its 5 trillion euro portfolio. It’s not clear what will happen next, which adds to the uncertainty.

As early as November, the main worry of the ECB’s bond market contact group was the large amount of debt that private investors would have to buy.

Julian Le Beron, chief investment officer for core fixed income at Allianz (ETR:ALVG) Global Investors, said, “We don’t think investors will buy European bonds next year.”


He is selling German bonds to buy U.S. Treasury bonds, which are what most investors want because growth and inflation are less uncertain, as he says.

Le Beron said, “You’ve got this triple-whammy: a hawkish ECB, the speed of quantitative tightening, and this quite large government bond issuance in the first quarter.”

Already this year, German yields have gone up by 250 basis points (bps), and Italian yields have gone up by more than 300 bps, including 50 bps in the last week alone.

Analysts at BNP Paribas (OTC:BNPQY), Deutsche Bank (ETR:DBKGn), and Citigroup (NYSE:C), which, according to Refinitiv, are three of the four largest banks selling euro government debt, think yields will keep going up into next year.

Germany’s 10-year yield is expected to rise by 45 basis points, to 2.75 percent, in the first quarter, according to BNP.


(Graph: According to many investment banks, bond yields will rise in the first quarter:

BofA says that quantitative tightening is starting earlier than the investors it polled thought it would. This makes a “breakdown” more likely, which is when markets can’t handle more issuance without investors asking for higher yields.

Investors will also have to think about how long Italy can keep paying its debts. Yields are now above 4%, which is the point where investors start to worry. BofA said that a “higher for longer” ECB adds to these worries.

But not every bank thinks yields will go up next year. JPMorgan (NYSE:JPM), which sells the most euro government debt, thinks it will go down. Others, like BNP, also think that yields will go down after they go up at first.

The hope is that higher yields will attract buyers and that a likely recession will make lower-risk assets like bonds more appealing. This is a common theme in bond markets around the world.

“If we see, as we expect, some kind of slowdown but not a heavy, deep recession, then there is room… to look at the euro zone as a market where it could be interesting to increase duration,” said Cosimo Marasciulo, a fund manager at Europe’s largest asset manager, Amundi. He was talking about interest rate risk.


Chris Jeffery, head of rates and inflation strategy at Legal & General Investment Management, said that without the ECB, the region’s banks would have to buy the debt.

Jeffery said, “Banks are the only type of sector that can make their own liabilities when they buy assets.”

JPMorgan stated last month that they have been assisting in several countries since the summer.This may be a good sign.

Swap spreads, which measure the premium on the fixed-leg of an interest rate swap used by investors such as banks to hedge against rate risk, needed to fall even further in relation to bond yields, according to Jeffery, to make the debt more appealing.

Related: The EU imposes a global minimum tax of 15% on multinational corporations.

Gerard Fitzpatrick, head of fixed income at Russell Investments, said that pension funds and insurance clients are also interested.

Last week, Saskia van Dun, head of the Dutch debt office, told Reuters that the biggest problem for governments will be when to act.

Investors said that they will also have to be careful about the maturity dates they choose and pay investors enough for them to buy the debt.

“Since QE has been in the system for a long time, taking away that net supply, private investors will now set the prices at the margin,” said Snigdha Singh, co-head of fixed income, currencies, and commodities trading at BofA for EMEA.


Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button