Orders for the first issue of EU bonds to fund its Support to Mitigate Unemployment Risks in an Emergency (SURE) program smashed bond market records as investors sought €233 billion in bonds while only €17 billion were on offer.
The 10-year tranche of €10 billion was priced to yield minus 0.24%, considered a winner by investors when compared with Germany’s bonds yielding below minus 0.60%.
The enthusiasm for the issue bodes well for the €100 billion in bonds the EU plans to issue in the SURE program, as well as for the €750 billion next year to fund the EU’s recovery program.
Brussels has already pledged more than €87 billion from the SURE proceeds to 17 countries to help alleviate the burden of unemployment payments during the COVID-19 pandemic.
Some analysts suggested that the massive demand shows investor appetite for an alternative to US Treasuries, which dominate the government bond market with $27 trillion in outstanding securities. The EU has a long way to go to get to a fraction of that. But demand is clearly there.
The success of the EU issue had an immediate knock-on effect for Italian bonds. The Italian Treasury got more than €90 billion in orders for the €8 billion in bonds it sought to sell last week, and was able to price the bonds at a 1.76% yield, the second-lowest yield ever for 30-years.
Italy’s bond fell below a 0.76% yield last week as the restoration of COVID-19 restrictions throughout Europe reaffirmed investors’ belief that the European Central Bank will expand its asset purchase program.
The icing on the cake was a rating boost from S&P late Friday. The agency not only affirmed the BBB rating for Italian bonds but also upgraded the outlook from negative to stable.
The surprise decision enabled Italian 10-year bond yields to sink to near 0.67% in Monday trading before bouncing back to 0.73%. yields reached close to minus 0.38%. Bond yields move inversely to prices, so lower yields mean higher prices.
Germany’s 10-year bonds, after slipping below minus 0.62% last week, have recovered to slightly above minus 0.58%. The yield on the newly issued 10-year EU bonds shed nearly 10 bps after issue to sink below minus 0.30%.
The spike in COVID-19 infections and throughout Europe have heightened interest in the this week. Most analysts have been expecting the central bank to announce an increase in bond purchases at its December meeting, and investors now hope that policymakers will signal their intentions this week.
One signal may be a downward revision in economic forecasts as the COVID resurgence puts more optimistic projections in doubt. Opinions among the 25 council members have been divided on the need for further stimulus, but new concerns may allay some of the differences.
Analysts expect the ECB will boost its asset purchase program by as much as €500 billion at the December meeting, even though it still has €750 billion left in its current program of $1.35 trillion.
In addition to the COVID concerns, the outcome of the US election next week may create some turbulence in the European government bond markets. An indecisive or contested result could encourage moves into safe-haven bonds, such as those of Germany. A prolonged dispute or protests could create further uncertainty and volatility. Some analysts suggest that markets are underestimating the risks of the US election.