Next year, governments in the euro zone will need to persuade private investors to step in and purchase 400 billion euros more in debt, which would put pressure on the region’s shattered bond markets as the European Central Bank continues to withdraw its assistance.
The European Central Bank (ECB), which has been essentially a guaranteed debt purchaser since it began quantitative easing (QE) in 2015, will start selling off its holdings. It even bought up all the new bonds that governments offered from at least 2019 to 2021.
Governments need additional funding as they work to lessen the impact of rising energy prices. Next year, Germany plans to issue a milestone amount of debt.
According to BofA, investors will have to take up twice as much new public-sector debt in 2023 as they did a decade ago.
The uncharacteristically hawkish ECB last week pushed investors to market in half a percentage point more rate hikes next year, which means issuers will have to work longer to find takers and risk paying up further.
The central bank will sell off bonds from its 5 trillion euro holdings at a rate of 15 billion euros each month between March and June, however, it will continue to reinvest maturing debt acquired during the pandemic. The uncertainty is increased by the fact that it is unclear what happens next.
The enormous quantity of the debt that private investors had to purchase was listed as the most commonly raised issue by the ECB’s bonds market committee as early as November.
According to Julian Le Beron, a chief investment officer for core fixed income at the Allianz Global Investors, there is minimal interest among investors to purchase European bonds in the upcoming year.
He is buying U.S. Treasuries instead of German bonds because he believes there is less ambiguity over growth and inflation.
Italian yields have risen more than 300 bps, notably 50 bps just last week, while German yields have already risen by 250 basis points (bps) this year.
Refinitiv revealed three of the top four banks selling euro government debt are BNP Paribas, Deutsche Bank, and Citigroup. Analysts at these institutions predict that yields will continue to rise throughout the following year.
One factor that BNP predicts will drive up Germany’s 10-year yield further 45 bps to 2.75% during the first quarter is debt sales.
BofA claimed quantitative tightening is beginning sooner than the investors it polled had anticipated. This raises the possibility of a “breakdown,” in which markets are unable to absorb additional issuance without consumers demanding higher returns.
Without the ECB, the banks of the area would have to purchase the debt, according to Chris Jeffery, director of rates and inflationary strategy at Legal & General Investment Management.
Jeffery said the banks are the only type of industry that is capable of generating its own liabilities while purchasing assets.
It might be a good indicator that they have already intervened since the summer in several nations, as JPMorgan reported last month.
Investors will likewise have to consider Italy’s ability to service its debt. The fact that yields have risen above 4% worries investors. A “higher for extended” ECB adds to those worries, as per BofA.
Not all institutions, meanwhile, anticipate rising yields in 2019. JPMorgan, the market leader for selling euro government debt, anticipates a decline. Others, like BNP, predict that yields will decline after first rising.
It is hoped that higher rates will entice purchasers and that a potential recession will eventually increase demand for lower-risk assets like bonds. This is a general theme throughout international bond markets.
Regarding interest rate risk, Cosimo Marasciulo, the fund manager at Europe’s largest and leading asset manager Amundi, stated that if there is a downturn but not a severe, deep recession, there is room to consider the euro zone as a market where it may be interesting to lengthen the duration.
