As the traditional lines between the eurozone's riskier and safer bond markets become increasingly blurred, investors are looking to secure attractive yields in some of the eurozone's most It buys up the bonds of countries that are in debt.
Analysts said traders were encouraged by lower debt ratios in Italy, Portugal, Greece and Spain. This is in addition to the large rise in euro zone debt at the end of last year due to expectations for interest rate cuts, and the difference in borrowing costs between Italy and Germany, an important measure of euro zone risk, is 1.56 percentage points, close to 2 percentage points. contributed to the reduction in Lowest year. As of October, the difference was more than 2 percentage points.
The narrowing of the spread marks a major shift in sentiment across the eurozone, just over a decade after a prolonged debt crisis nearly collapsed the single currency and led to bailout loans for many countries. .
“We think 2024 will be the year where the lines between core and periphery blur,” said Aman Bansal, chief European rates strategist at Citi.
He pointed to the decline in debt in peripheral countries to GDP levels and the increase in net debt issuance in France and Germany.
Christian Kopf, head of fixed income at Germany's third-largest asset manager Union Investment, said he had made “considerable” profits from buying Greek and Portuguese bonds, with both countries' public debt ratios falling. he added.
“It's really simple,” he said. “Bonds with higher yields than German Bundestags are likely to also yield higher unless the issuer's solvency deteriorates significantly, but this is not the case in the eurozone periphery.”
Over the next two years, the IMF predicts that debt-to-GDP will increase in France and Belgium, but will decline significantly in Greece and Portugal, and slightly in Italy and Spain.
Euro zone bond prices have been falling this week ahead of the European Central Bank's interest rate meeting on Thursday, with investors watching for any hints about when the central bank will start cutting interest rates. The market has priced in the ECB's rate cut this year by 1.3 percentage points.
Still, despite ECB deposit rates currently at a record high of 4%, Spain, Greece and Portugal have grown faster than Germany and France in the past year, while Italy's economy has stagnated. ing.
Oliver Eichmann said, “Spain and Portugal were less affected by Russia's war against Ukraine because the Iberian Peninsula was less dependent on energy imports from Russia, but the Next Generation EU Common Bond Issuance Program is a has benefited the most.” Head of Fixed Income Rates for Europe, Middle East and Africa at DWS. Next Generation EU was established in 2020 to rebuild the economies of regions hit by the pandemic.
“These established instruments are likely to be used again in the future, which will help reduce spread volatility,” Eichmann said.
The narrowing of spreads came despite a sharp rise in bond sales this month after the ECB announced it would halt its bond purchases earlier than planned.
Citi forecasts that euro zone government bond issuance this month will be a record 165 billion euros, up 13% from January last year. But demand remains strong as markets look to the ECB to cut interest rates by the end of the year, with Spain on January 10 attracting the largest government bond order in history and Italy winning 91 billion euros in an auction to sell 30-year bonds. This was Italy's largest order. I've been making reservations since the beginning of 2021.
Citi's Bansal said the pressure from net issuance, excluding bond redemptions and ECB purchases, was greatest among the euro zone core countries, with France on track for a record 140 billion euros in net issuance this year.
“France is slowly moving from a core economy to a periphery economy in terms of fiscal fragility,” said Tomasz Wieradek, chief European economist at T. Rowe Price.
This week's Eurostat data showed France's annual budget deficit was 4.8% of GDP in the third quarter of last year, up from 4.4% in the previous quarter, while Portugal, Greece and Ireland each had surpluses. became.
On the other hand, many investors believe that the ECB's so far untested transmission safeguards would allow the ECB to purchase unlimited amounts of bonds in member countries judged to be suffering from unreasonable increases in borrowing costs. It is believed that this will provide protection against high interest rates in each country. Bonds between “peripheral” countries.
Mary Therese Burton, chief investment officer for fixed income at Pictet Asset Management, said the euro zone's borrowing costs would be lower due to the “collective nature of risk” across the euro zone, in addition to increased pressure on the euro zone's largest country to raise interest rates. He said he expects the situation to continue to subside this year as well. Spending on defense and energy transition.
“Despite all the damning claims about the European project, there is only a border narrative about the broader socialization of debt… in which case spread convergence makes sense,” Burton said. Ta.
Additional reporting by Martin Arnold in Frankfurt
