Central Banks Pile Into Europe's Common Debt
October 23 2020 - 11:21AM
Dow Jones News
By Anna Hirtenstein
Central banks were among the biggest buyers of European common
debt this week, signaling growing trust that the euro will hold its
own through the pandemic.
The European Commission -- the European Union's executive arm --
issued its first wave of common debt to finance its
coronavirus-relief programs Tuesday. It raised EUR17 billion,
equivalent to $20 billion, from the sale of 10-year and 20-year
bonds.
Close to 40% of the benchmark 10-year bond was snapped up by
central banks' reserve managers, which is about double the average
for prior European bonds, according to research from Deutsche Bank.
They also bought 13% of the 20-year bond.
"Demand signals a vote of confidence on the euro as a reserve
asset," said George Saravelos, global head of FX research at
Deutsche Bank.
This year has been a significant turning point for the EU's
financial cohesion. The region is perceived to have overcome some
historical divides that had held back collective action,
particularly after the approval of an economic recovery fund that
will include both grants and loans for the countries hardest-hit by
the pandemic. The bloc is financing its coronavirus-relief programs
with common debt such as Tuesday's issuance, spreading the cost of
the pandemic across its member states.
This has been a key contributor to the recent rise of the euro,
according to Vasileios Gkionakis, head of foreign-exchange strategy
at Lombard Odier. The common currency has gained 1.1% against the
dollar this month and 5.7% over the year.
Mr. Gkionakis expects the currency to strengthen further.
"Investors are getting positive signals coming out of Europe,
including this step toward mutual debt issuance," he said. "That
restoration of faith and confidence is likely to attract more
demand from reserve managers."
The pricing of the bonds is also likely to lure investors, said
James Athey, an investment manager at Aberdeen Standard
Investments.
"Compared to France, it's more highly rated but also has a
higher yield. That's the Holy Grail," Mr. Athey said. The higher
yield is because the market is new and relatively small, making it
harder to buy and sell the bonds, but that is unlikely to be a
concern for reserve managers because they tend to hold assets for a
long time, he said.
The European Commission is set to issue up to another EUR833
billion of common bonds to finance its coronavirus-relief programs
in the coming years. This wave of issuance is likely to increase
investor access to European government debt and push up the flows
of capital into the region, further boosting the euro, according to
Kit Juckes, a macro strategist at Société Générale.
This would mark a turnaround for the European government bond
market. The ECB has bought so many assets as part of its monetary
stimulus that they have been in short supply for years. This year,
the net supply of government bonds is expected to be negative,
according to projections from UBS. This has dampened the ability of
foreign investors to buy euro-denominated assets.
The incoming wave of EU bond issuance is likely to change this
and allow central banks to load up on euros if they choose.
"If I'm managing currency reserves and I think the euro might
strengthen, I would buy more euros," Mr. Juckes said. Also "a
pan-European AAA-rated piece of paper is pretty attractive."
Write to Anna Hirtenstein at anna.hirtenstein@wsj.com
(END) Dow Jones Newswires
October 23, 2020 11:06 ET (15:06 GMT)
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