Europe breaks records with rising government bond issues
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European new debt markets had a turbulent start to the year, defying fears that a large borrowing would make it more expensive to raise funds to help finance the economic recovery after Covid-19.
Bank-run bond syndication deals had their busiest first quarter, with the equivalent of $ 150 billion raised by governments in Europe and the UK, the highest volume for this period of the year on Refinitiv’s records dating back to 2000.
Global bond issuance by major euro area government borrowers, including auctions, amounted to € 373 billion, according to figures compiled by ING, up 20% from last year .
Demand has held up despite the surge in supply and volatile price movements for bonds traded in the open market. Strong investor interest in the primary new debt market, supported by the European Central Bank‘s buying program, allayed concerns that governments would have to pay significantly more for their loans.
“January and early February was probably the hottest primary market we’ve ever had,” said Jamie Stirling, global head of sovereign, supranational and agency debt capital markets at BNP Paribas. “The volumes have been incredible.
The start of the year is the busiest funding season for governments, accelerated this year by public treasuries rushing to take advantage of favorable terms before borrowing costs rise.
Governments have raised more debt through bond syndications than in any three-month period except last spring, at the height of the Covid-19 crisis. Eurozone debt to GDP fell from 86% in March 2020 to 97% at the last official reading at the end of September.
“Last year was the biggest ever for the industry. There was probably a bit of concern at the start of this year as to whether the market would digest similar emission levels again at such tight prices, ”Stirling said.
The appetite for new debt has allayed any price concerns. The average yield on eurozone bond syndications since January stood at 0.75% on a duration-weighted basis, compared to 0.94% in the first three months of 2020, according to BNP calculations Paribas. Falling yields on newly issued bonds show that governments could still raise funds at lower rates despite mounting debt.
The numerous ECB bond purchases on the open market and the keen interest of asset managers inundated with liquidity have helped to stimulate demand for new bond issues. Order books for bond syndications records broken, allowing public debt agencies to lobby for better rates. Long-term issues have been particularly active, with issuers attempting to lock in attractive prices.
The sharp decline in global bond markets since mid-February, driven by fears of inflation in the United States, has threatened the enabling environment for new bonds as investors face the prospect of a decline in value newly purchased bonds.
“I would have expected there to be more difficulties,” said Antoine Bouvet, senior rate strategist at ING. If investors fear a fall in prices, they may require issuers to offer a higher premium on the new bonds as compensation. Bouvet said the low borrowing costs partly reflected investor confidence that the price of European bonds will not slide too far.
The rise in bond yields from the United States prompted “a bit of rethinking”, according to Ioannis Rallis, who heads this type of issue at JPMorgan.
Investors who took on longer-term debt faced steeper price declines as these longer maturities carry a higher risk of inflation. The revaluation of the bond markets has come faster than many analysts had anticipated.
“Some investors were probably a little offside at one point,” Rallis said. Demand from issuers and investors has recently shifted to medium and short term bonds. “Demand for the long term will come back but we need to see some stability,” he added.
The European government green bond market grew rapidly during the quarter. Italy raised 8.5 billion euros in biggest ever in Europe start of green bonds. France has also tapped into the market while the UK and Spain have taken steps towards their first green offerings.
The market expects a substantial boost in the second half of the year as the EU begins issuing € 225 billion in green bonds as part of its € 750 billion coronavirus recovery fund.
Green bonds are “both very popular politically at the moment, but there is also strong demand from the investor side,” said Rallis.