Yield-starved investors likely to snap up Europe's debt sales

London

THE insatiable hunt for yield will help snap up Europe's latest wave of debt sales.

After Italy, Ireland and Slovenia racked up almost US$200 billion of orders in their first syndicated bond issues of the year, governments in the region including France and Belgium are slated to tap the market for another 30 billion euros (S$48.6 billion) this week, according to Danske Bank.

The offerings are likely to go down smoothly thanks largely to the European Central Bank's bond-buying backstop and liquidity injections. A near-record 3.5 trillion euros of spare cash is now sloshing around the economy, and it is encouraging investors to pile on sovereign debt holdings, even as governments borrow and spend more to shield their economies.

"The expectation of significant fiscal stimulus, further supply of US Treasuries and potentially higher rates has not rattled the market," wrote Jens Peter Sorensen, chief analyst at Danske Bank. "With the significant excess liquidity and negative rates, investors are 'chasing yield'."

He expects France and Belgium to sell 50- and 10-year bonds, respectively, this week through banks. While that's more expensive than auctions, it allows governments to raise very large sums quickly while diversifying their investor base.

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Euro-area governments will raise over one trillion euros of debt this year, according to ING Groep. The ECB's 1.85 trillion euro emergency bond-buying programme is more than sufficient to buy it up even after accounting for redemptions, according to banks including JPMorgan Chase.

Adding to the buoyant demand for the securities is the growing pile of negative-yielding debt in Europe, which is pushing investors looking to escape sub-zero rates further out the yield curve.

Citigroup strategists including Aman Bansal expect the issuance of maturities longer than 15 years to make up a quarter of all sales in 2021, a similar level to last year.

There's also a seasonal pattern that tends to explain the strong appetite for debt in the euro-area as the year kicks off, according to BofA Global Research strategists including Sphia Salim.

"Together with higher issuance activity, investors also tend to be particularly active in asset allocation during the first phases of the year," they said.

A sale of French 30-year debt was oversubscribed by the most since August recently, while demand for its Spanish peer rose to the highest since 2019 as investors chased yield. Italy's sale of 10-year bonds, meanwhile, racked up orders in excess of 105 billion euros, falling just short of a record set in June. BLOOMBERG