Global buyers are drowning Europe’s debt-ridden governments in cash | EUROtoday

DEuropean governments have sparked document demand from worldwide buyers for his or her bond issuances this week. They wished to safe strong returns whereas they nonetheless existed.

Central banks and funds from the Middle East and Asia have been solely too pleased to lend cash to international locations like Spain, Italy and Belgium, all of which had traditionally thick order books. Since rate of interest cuts are broadly anticipated over the course of the 12 months, the yields on supply may quickly begin to decline once more.

This is an encouraging signal for European treasuries in a section during which the European Central Bank is now not supporting the bond market to the identical extent, however is as a substitute lowering its place. After years of destructive rates of interest, Europe now presents buyers a window for first rate returns once more.

Record European bond issuance

“International buyers, particularly Japanese and Chinese investors, are buying far fewer U.S. Treasuries than before and diversifying their holdings more widely into Europe,” stated Raphael Thuin, head of capital markets methods at Tikehau Capital, which manages 42 billion euros. These included each central banks and pension funds.

Syndicated bond issuance hit an all-time excessive of 41 billion euros this week, setting a document for complete European bond issuance of greater than 120 billion euros, knowledge compiled by Bloomberg present. While January usually sees sturdy demand, order e book evaluation suggests better urge for food from Asia and the Middle East.

An instance of that is Belgium. Orders for Belgium’s new 10-year bonds have been greater than ten instances increased than the 7 billion euros the nation wished to boost. Almost a fifth went to buyers from exterior Europe. Two years in the past their share of the spending quantity was solely a couple of tenth.

Stable demand

In the debt of higher-rated euro space states, the share of overseas buyers had fallen to a couple of quarter on the finish of 2022, from virtually half in 2014, in line with ECB statistics. This reveals that the potential for inflows of cash from exterior Europe is gigantic.

An evaluation by Bank of America strategists estimates that as much as €7 trillion may movement into euro space mounted revenue property within the coming years after ECB rates of interest rose above pre-financial disaster ranges.

“This supports our view that 2024 supply, even if higher than 2023, can be well absorbed,” wrote the financial institution’s strategists Erjon Satko and Sphia Salim. This week’s transactions “point to particularly healthy demand.”

The inflows into the European bond market may take away a big burden on the frequent forex. The euro has recovered from under parity to the greenback on the finish of 2022 to presently round $1.0969. Analysts surveyed by Bloomberg anticipate it to rise additional to $1.12 by the tip of the 12 months.

“The euro is clearly seen as stable again. Particularly for Asian and Middle Eastern investors, renomination risk is no longer priced in the way it was between 2010 and, say, 2016 or 2017,” says Frederik Ducrozet, head of macro analysis at Pictet Wealth Management. “This is no longer an issue. One cannot rule out the possibility of future crises, but even the populists in Italy, France and elsewhere are playing by European rules. This is positive for the attractiveness of investing in government bonds.”

Not everyone seems to be getting concerned now. Nadège Dufossé, Global Head of Multi Asset at Candriam, is staying on the sidelines in the interim and prefers to attend for barely increased returns. Nevertheless, she thinks extra of bonds than shares.

Rush on authorities bonds may proceed

“One reason we prefer bonds over stocks is that the biggest risk today is being disappointed by economic growth,” stated Dufossé, who stated the consensus is that the economic system could have a mushy touchdown. When progress disappoints, “the bond portion of your portfolio hedges the equity portion.”

The rush on authorities bonds may due to this fact proceed for some time, however not ceaselessly. Yields are prone to turn out to be much less engaging to buyers if the ECB cuts rates of interest by 140 foundation factors this 12 months, as cash markets have already priced in.

“The extent of the shift from ‘higher for longer’ or even ‘higher for good’ in October to current expectations of rapid rate cuts has created this ideal market,” stated Lee Cumbes, DCM boss at Barclays. “The transactions act as a major green light for other sovereign issuers — reminding markets how interesting fixed income securities can be.”