European governments and related organisations have ramped up their sales of new debt this year, in the latest sign of bond markets bracing for rises in interest rates and an increase in political risks.
Overall borrowing from eurozone sovereigns, local authorities, agencies and supranationals such as the European Investment Bank is currently at €210bn — the highest year-to-date amount since 2012, Dealogic data show, and the second-highest level on record at this stage of the year.
“There’s definitely an expectation among clients that rates are going to rise,” said Henrik Johnsson, co-head of global debt capital markets at Deutsche Bank.
“This year compared to last year, they’ve been issuing more earlier in the year — partly down to expected rates rises and what’s going to happen with the ECB [European Central Bank], and also political risk,” he added.
While issuers typically tap markets at a faster rate earlier in the year, the total amount borrowed so far is 11 per cent ahead of last year’s levels over the same period.
The increased issuance comes at a critical moment for borrowers in the continent’s bond markets, which have benefited from record low rates and accommodative monetary policy over recent years.
The ECB has bought more than €1.4tn of sovereign bonds since March 2015 as part of its efforts to stimulate the economy, but at the end of this month it will reduce its overall asset purchases from €80bn to €60bn a month.
The impending reduction in purchases — which have supported bond prices over the past two years and helped drive yields and borrowing costs to record lows — comes after the US Federal Reserve raised short-term interest rates this month to 1 per cent.
Inflation in the eurozone hit 2 per cent in February, its highest level in four years, prompting a debate over whether rates should remain negative until the end of its bond-buying programme. The ECB’s deposit rate is currently negative, at minus 0.4 per cent.
“Tapering bond purchases further down from the current €60bn a month can help savers to meet their pension goals and revive banks’ profitability, but it can also make it more expensive for governments to borrow, penalising public spending and investment,” wrote Alberto Gallo, head of macro strategies at Algebris, last week.
Emerging market governments have also increased their borrowing rates ahead of further expected rises in the US. Governments in Asia excluding Japan have borrowed $8.2bn in the year so far, compared with $6.5bn over the same period last year.
Bond markets have increased their focus on a calendar of perceived political risks over 2017. This year, French government bonds have traded at their highest volumes since the eurozone crisis ahead of April’s presidential elections, with investors warning over a potential upset for anti-euro candidate Marine Le Pen.