EUROZONE GOVERNMENTS REIN IN BORROWING DESPITE ULTRA-LOW RATES / THE FINANCIAL TIMES

Eurozone governments rein in borrowing despite ultra-low rates

Net supply of sovereign bonds this year will come to €188bn — the lowest since 2008

Tommy Stubbington


The reluctance of national governments to ramp up borrowing could help to halt a sell-off that has swept eurozone markets, it is hoped © Bloomberg


Eurozone governments are on course to raise less cash from bond investors in 2020 than any year since the financial crisis, even as the European Central Bank hoovers up fresh supply and borrowing costs hover near record lows.

Analysts at JPMorgan estimate that net supply of euro-area sovereign bonds this year will come to €188bn, the lowest since 2008.

That figure, based on issuance plans published by national debt agencies, is derived from €762bn of bond sales over the year, while €574bn of existing bonds mature.

The drop in new borrowing, down about 4 per cent from 2019, comes at a time when ultra-low bond yields — which fall as prices rise — have cut the cost of funding for governments across the world, prompting calls for them to abandon restraint in spending.

The €188bn figure is also considerably less than the €240bn the ECB is due to buy under its €20bn-a-month quantitative easing programme, although a big chunk of those purchases is likely to be made up of corporate bonds or those issued by local governments.

Still, some investors think the reluctance of national governments to ramp up borrowing could help to halt a sell-off that has swept eurozone markets since yields touched all-time lows last August.

“There will be downward pressure on yields going forward, and one of the reasons is the dynamics of supply and QE,” said Silvia Dall’Angelo, a senior economist at Hermes Investment Management in London.

Some analysts blamed last month’s weakness in bond markets on a flurry of upcoming supply: Germany, Austria, Ireland and Portugal have all sold new bonds so far this week. But the modest issuance plans for the year as a whole should keep a lid on longer-dated bond yields, said AllianceBernstein portfolio manager Nick Sanders.

“Everyone’s been talking about the amount of supply coming into the market in January,” he said. “But that’s no different from any other year. We don’t buy the narrative that it will steepen yield curves.”

Some bond bears have pinned their hopes on a political shift in Germany, where some leading politicians have recently backed away from the traditional cast-iron commitment to running a balanced budget. However, there is no sign of a 2020 borrowing binge, with the country’s debt office announcing a plan to sell €148bn of new bonds this year — the same amount that falls due.

“I don’t see where this massive fiscal impulse is going to come from,” said HSBC fixed-income strategist Chris Attfield. “It’s not clear there’s a political process in Germany that gets us there.”

Even if Berlin — along with other eurozone governments — does eventually loosen the purse strings, some investors are not convinced there will be a lasting impact on bond yields, unless the resulting fiscal stimulus gives a major boost to the economy.

“I don’t see eurozone markets as very sensitive to supply and demand technicals,” said Salman Ahmed, chief investment strategist at Lombard Odier.

“I’ll be looking at what happens to growth and inflation.”