January 31, 2020 / 12:26 PM / 19 days ago

Euro zone sovereigns enjoy record demand at January bond sales

LONDON, Jan 31 (Reuters) - European sovereign borrowers’ January fundraising round saw unprecedented demand from bond investors who placed an average of over six euros in orders for each euro raised in debt. With the net supply of euro zone debt expected to plummet in 2020 compared to 2019, investors dashed for sovereign bonds sold via bank syndicates this month, with total orders exceeding 270 billion euros, according to Reuters analysis based on data from Refinitiv IFR.

With 45 billion euros of bonds sold, that meant demand exceeded supply by more than six times, the highest ratio since at least 2012, the data showed. The figures are for syndicated bond sales, which governments use to tap a broader investor base.

One landmark was Spain’s 10-year bond, which attracted the biggest order book ever for a euro zone bond sale. Another was Greece, which sold its first 15-year bond since the financial crisis and received the highest level of demand since it returned to capital markets in 2017.

Long-dated, 30-year bonds from Italy and France were also strongly oversubscribed.

Issuance had got off to a strong start last January too, with a record 48 billion euros in bond sales, but demand had not reached this year’s levels.

For an interactive version of this chart click here: tmsnrt.rs/38TnrD2

Bankers arranging the sales attributed the bulging order books to several factors: the European Central Bank’s decision in September to renew bond purchases and pent-up cash at investment funds.

Southern European debt has also become more attractive to those seeking fixed-income yield. Political uncertainty has abated in Italy and Spain, which still offer positive yields, while German yields have fallen sharply again on fears of the coronavirus epidemic’s impact on the global economy.

“In this environment, looking for higher-yielding, but good names, or extending duration to capture higher-yielding products is natural. That’s exactly what we’ve seen, a huge response,” said Lee Cumbes, head of public sector debt for Europe, Middle East and Africa at Barclays, a lead manager on the Italian and Greek deals.

“Whether it’s quantitative easing, providing support for benchmark yields, or... it’s growth and inflation outlook, giving support for benchmark yields, both of those things are encouraging people to seek out extra spread.”

Euro zone bond markets closed 2019 with a sell-off after U.S.-Chinese trade relations improved and the global growth outlook appeared to brighten.

“If you look at the sell-off in Bund market through November-December last year, a lot of that was probably people effectively setting up to get short,” said Craig Inches, head of rates and cash at Royal London Asset Management.

Now, according to Inches, investors were reinvesting profits from those shorts in the semi-core and peripheral syndications seen at the start of 2020.

He has been buying French and Italian bonds this year.

FEAR OF MISSING OUT

Euro zone bond supply is set to decline markedly in 2020, with net bond issuance seen at 190 billion euros, the lowest since 2008, according to JPMorgan. That’s based on an expected 764 billion euros of gross issuance and 574 billion euros of redemptions.

“There’s certainly competition to get those bonds because net issuance looks likely to fall significantly year-on-year,” said Barclays’ Cumbes.

Rabobank strategist Lyn Graham-Taylor noted that order book growth has been correlated with the ECB’s bond purchases, which first started in 2015.

“It’s now difficult to get bonds in size in the secondary market so people like using the primary.”

The buoyant order books may also be inflated by investors who place higher orders to make sure they are actually allocated the bonds they want, especially if they received a smaller allocation during the previous sale.

“I’m sure the allocations haven’t been great for accounts, so it’s like a self-fulfilling prophecy…. Next time you think I really need to get my bonds somehow, so the order books keep getting bigger,” said a London-based banker who arranges sovereign bond sales.

Reporting by Yoruk Bahceli; Editing by Toby Chopra

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