European governments witnessed an unprecedented surge in bond sales this week, attracting robust demand from global investors eager to secure bonds with attractive yields amidst expectations of impending interest-rate reductions. Central banks and funds from the Middle East and Asia showed enthusiasm in lending to countries such as Spain, Italy, and Belgium, all of which reported historically high order books.
This trend signals a positive development for European nations as they proactively commence funding for 2024 budgets. The region’s central bank has shifted from being a significant buyer in the bond market to reducing its holdings. This shift, coupled with the prospect of decent returns, is drawing international investors back to Europe after years of sub-zero rates.
Raphael Thuin, head of capital market strategies at Tikehau Capital, managing €42 billion, noted that international buyers, particularly from Japan and China, are increasingly diversifying their holdings to Europe. The borrowing from governments via banks reached an all-time high of €41 billion ($45 billion) this week, driving total European bond sales to over €120 billion.
Belgium, for instance, experienced over 10 times the demand for its 10-year debt compared to the €7 billion offered, with nearly one-fifth of orders coming from regions outside Europe. Analysis by Bank of America Corp. suggests that up to €7 trillion could flow into euro-area fixed-income assets in the coming years, indicating strong demand.
The inflows into Europe’s fixed-income market may positively impact the region’s single currency, the euro, which has rebounded from below parity with the dollar in late 2022. Analysts foresee further strengthening of the euro to $1.12 by the end of the year.
The ongoing bond sales appear to be attracting a more stable, long-term investor base. Unlike previous instances where “fast money” quickly flipped bonds for a profit, current trends show continued tightening of bonds after deals, indicating sustained demand.
Banks are contributing to the demand surge, with government bonds appearing more attractive compared to European rate swaps. The recent market dynamics, along with favorable ECB deposit rates at a record 4%, reinforce the expectation that 2024 supply, even if higher than 2023, can be well absorbed.
However, not all investors have joined the trend. Some, like Candriam’s Nadege Dufosse, prefer to wait for higher yields but express a preference for bonds over equities. Despite the optimism, market participants acknowledge that the pace and demand for bonds may not last indefinitely, as yields are expected to become less appealing with anticipated interest rate cuts by the ECB.
In conclusion, the recent surge in bond sales is seen as a positive market development, highlighting the attractiveness of fixed-income assets and the potential for sustained global interest in European bonds.
