ECB’s bond buying is hoped to offset a debt glut heading into 2021
Banks are sanguine about the impact on markets, as unwavering central bank support should curb bond-market volatility and cap government borrowing costs in the eurozone
London — European bond investors are looking to the region’s central bank to absorb a glut of sovereign debt heading to the markets in 2021.
Bond issuance by euro-area nations may total €1.25-trillion in 2021 as they fight the fallout from the pandemic, on par with the record levels reached in 2020, according to ING Group. In addition, the EU itself is set to be a leading issuer, with a landmark stimulus plan that will be financed by jointly issued debt.
In normal times, such a flood of sales would bolster yields. But banks from ING to JPMorgan Chase and Société Générale are sanguine about the impact on markets, expecting the issuance to be more than offset by the European Central Bank’s (ECB) multi-trillion-euro asset-purchase programme. Just this month, the institution boosted its emergency debt-buying programme by 37% to €1.85-trillion.
“ECB purchases of euro-area bonds in 2021 could exceed net issuance by almost 60%,” said Eric Oynoyan, a strategist at BNP Paribas, who estimates next year’s total issuance at €1.1-trillion, about 6% lower than in 2020. “It should contribute to partly offsetting the negative impact for bond yields of stronger growth and inflation in 2021,” he said.
The institution’s debt buying will help contain the German 10-year yield, the region’s benchmark, in range between minus 0.2% and minus 0.5% in 2021, according to BNP. The rate was about minus 0.57% on Wednesday. ECB purchases will exceed euro-area issuance — after adjusting for redemptions — by €240bn, ING estimates.
Unwavering central bank support should curb bond-market volatility and cap government borrowing costs in the eurozone, allowing efforts to revive the economy to progress unhampered. While the ECB isn’t the only monetary authority globally to pursue the policy of asset purchases known as quantitative easing (QE), other central banks are seen intervening less in markets next year.
ECB debt buying isn’t without its complications. As the central bank hoovers up unprecedented amounts of securities from the market, other investors are getting squeezed out. The institution is set to own about 43% of Germany’s sovereign bond market by the end of 2021 and about 40% of Italian notes, according to Bloomberg Intelligence. That’s up from around 30% and 25%, respectively, at the end of 2019.
A lot of that buying may happen in January. That may be the busiest month of the year for debt issuance, with about €175bn in sales, including those tied to the EU’s job support programme, according to Société Générale.
Eurozone debt agencies will likely issue more longer-maturity bonds in 2021 as they look to lock in lower borrowing costs for longer and a lot of sales may be conducted through banks, according to strategists. Such offerings, known as syndications, are more expensive than auctions, but they allow governments to raise very large sums quickly while diversifying their investor base.
“We expect a lot of competing supply, with many 10-year syndicated deals, as well as the EU resuming support to mitigate unemployment risks in an emergency (SURE) issuance for about €10bn,” strategists at Société Générale including Jorge Garayo wrote in a note. “France may bring a new 50-year, and we expect this and a 15-year” Italian note “to be the first tests of demand for long paper,” they wrote. The EU’s SURE programme is a temporary measure designed to help governments keep workers in jobs.
Ireland and Portugal are often the first out of the blocks with syndicated sales and 2021 should be no different, according to Garayo, who expects Germany, France, Italy, Spain, Belgium and Austria to follow. This way of issuing debt proved popular with European governments in 2020 as they borrowed unprecedented amounts to fight the pandemic.
Environmental bonds are also set to make a bigger splash next year with Italy and Spain’s inaugural green notes joining the likes of France, which has said it will offer more of the securities.
The EU itself plans to sell €225bn of such assets in 2021, which will make it the world’s largest issuer of debt used to finance environmentally friendly projects. The bloc — which is ranked AAA by the ratings agencies — will also be a major player in conventional debt as it taps investors for its pandemic recovery fund.
That has led to some market speculation that a surge in EU debt supply could crowd out other top-rated issuers such as Germany and the Netherlands. But Elvira Eurlings, director of the Dutch State Treasury Agency, sees no cause for concern.
“Appetite for AAA paper is enormous and supply is way below demand,” she said.
After the EU, one of the biggest issuers in the region will be Germany, which plans to sell a record $576bn of securities in 2021. Still, after excluding bills and adjusting for redemptions, the nation’s bond sales are seen at €86.5bn, which should be dwarfed by ECB purchases, according to Richard McGuire, head of rates strategy at Rabobank.
According to McGuire, “These calculations clearly show the scale of the ECB’s interventions and the fact that the notion of a pandemic-induced increase in supply being bearish for core bonds does not stand up to scrutiny.”
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