Investors show strong demand for Eurozone’s new government bonds
Summary
- Lower inflation and expectations that the peak in eurozone interest rates isn’t too far off are increasing the appeal of bonds, although investors remain cautious about the risk that prices could stay high for a prolonged period
The year’s first large eurozone government bond issues have received strong demand as investors remain undeterred by prospects of substantial debt supply to come, even as support from European Central Bank purchases dwindles.
Lower inflation and expectations that the peak in eurozone interest rates isn’t too far off are increasing the appeal of bonds, although investors remain cautious about the risk that prices could stay high for a prolonged period.
“The first bond issues for 2023 have mostly seen good demand, raising hopes that investors can absorb the huge amounts of issuance in store," said Jan von Gerich, chief analyst at Nordea.
“The general market environment has been supported by euro-area inflation data surprising to the downside, which has helped to ease worries about how high the ECB will have to raise rates," he said.
This will come as a relief to governments who need to fund substantial support measures aimed at subsidising high energy costs. On top of that, the European Central Bank will start reducing its bond holdings in March, removing a key support for bond markets.
The year’s first syndicated sales of bonds, which tend to be much larger in size than auctions and a better gauge of demand, “met with stellar demand," KBC Bank analysts said in a note.
Rate strategists at Barclays said orderbook sizes at these syndications “have been fairly robust by historic standards."
Austria, Ireland, Portugal and Slovenia all sold bonds via syndications last week, followed by Belgium, Italy and Latvia this week. All have received strong demand.
Ireland’s EUR3.5 billion issue of a new 20-year green bond proved particularly popular, with orders exceeding EUR35 billion, while Austria and Belgium both received record demand for 10-year bonds.
Austria’s EUR5 billion 10-year bond issue attracted a EUR32.1 billion orderbook, while Belgium’s EUR7 billion sale drew more than EUR51 billion in demand.
Such strong demand may not continue, however.
Uncertainty surrounding the inflation outlook remains high, so it might be premature to assume that longer-dated bond yields have peaked, Nordea’s von Gerich said.
“In addition worries about the impact of the ECB’s reduction on its bond holdings may increase, as we head closer to March."
Core eurozone inflation, which strips out volatile items including energy prices, has been persistently high, standing at 5.2% in December.
“We believe we have reached the peak for core [inflation] but our projections for coming months are very sticky until March [4.9-5%] and decelerate at a very gentle pace--we project core inflation at 2.7% in Q4 2023 with risks on the upside," said economist Hugo Le Damany and Francois Cabau, senior eurozone economist at AXA Investment Managers in a note.
The year has started well for bond issuance, which is a good sign but there’s still a lot to come.
In 2023, net supply to be absorbed by the market “looks set to reach a record high, at levels last seen in 2010-2012, due to the absence of ECB purchases and the beginning of quantitative tightening," Societe Generale rates strategists said in a note.
This story has been published from a wire agency feed without modifications to the text
