Europe's Riskiest Countries Find Debt Markets Wide Open -- Update
October 20 2020 - 8:14AM
Dow Jones News
By Anna Hirtenstein
Borrowing costs for Europe's riskiest governments are hitting
record lows as investors bet on newfound European political
cohesion. Also pushing yields lower are U.S. election dynamics
reverberating across the Atlantic.
Yields on 10-year benchmark debt of Italy and Greece dropped to
all-time lows last week, both well under 1%. In a sign inventors
see fewer risks among eurozone members, Southern European yields
have converged to the narrowest point in years with those of
Germany, considered the safest in the region.
Greece's borrowing costs shrank to the tightest point relative
to Germany since 2009 last week, a flashback to before last
decade's eurozone debt crisis exposed financial fault lines across
the Continent. Italy's are at their lowest since 2018.
The dwindling differentiation in borrowing costs among European
nations is a remarkable turn. In March, those yields spiked,
rekindling fears that the eurozone's various members wouldn't hang
together through the coronavirus crisis.
Instead, investors have flooded into European debt, having grown
comfortable with the European Central Bank's and the European
Union's response to the pandemic. A pan-EU stimulus plan, in which
all the nations share the financial burden, is seen as a leveler
for the worst-hit economies, which also happen to be the most
indebted.
The European Commission tapped the market on Tuesday for the
first issuance of its common debt that will finance its
coronavirus-relief programs, raising EUR17 billion, equivalent to
$20 billion, from the sale of 10-year and 20-year bonds. This
iteration is to finance a job-protection program for its member
states.
Europe's riskier government bonds rallied further in recent
weeks. Slipping growth and inflation in the face of a second round
of Covid-19 lockdowns have raised expectations that the ECB will
boost its stimulus at coming meetings.
Another factor far from Europe is improved poll numbers for
Democrats in the coming U.S. election. This has prompted some
investors to reassess their view of Treasurys, making European
government bonds more attractive. Bond prices rise as yields
fall.
"What markets are focused on is the widening in the polls,
[Democratic presidential candidate Joe] Biden pulling ahead by a
greater margin," said Scott Thiel, chief fixed-income strategist at
BlackRock. "It's bullish for stocks and bearish for fixed income.
If you're a European investor who's opportunistically invested in
the U.S., this outcome might shift you back to European
assets."
While election results in 2016 caught investors off-guard,
markets are factoring in the possibility that Democrats will win
the White House and both chambers of Congress. That would smooth
the way for stimulus spending plans to materialize quickly.
In theory, another jump in government spending would mean an
increase in supply of U.S. government bonds and faster growth. That
could depress bond prices and send yields up on Treasurys, though
the Federal Reserve's aggressive bond buying has kept a lid on
yields this year.
Jon Jonsson, a fixed-income portfolio manager at Neuberger
Berman, has sold off longer-dated Treasurys and bought more
Southern European government debt, which still has a positive
yield. He bets there could be a "repricing of Treasurys" if a big
stimulus bill is passed under a new administration.
Yields on 10-year Treasury notes have edged up in recent weeks
to 0.76% Monday, near their highest since June.
While both Europe and the U.S. have enacted big financial
responses to the pandemic, the market is focusing on the
differences in order of magnitude. The Democrats'
multitrillion-dollar spending plan dwarfs the EU's recovery package
of EUR750 billion.
"While fiscal policy is easy all around the world, no other
developed market is looking at this kind of level," besides the
U.S., said Seamus Mac Gorain, head of global rates at J.P. Morgan
Asset Management.
Also favoring European bonds is a quirk of derivatives markets.
The spread on three-month euro-dollar basis swaps, a contract that
traders use to hedge risk when they lend in one currency and borrow
in another, has turned negative since late August. This means
investors who mainly use dollars can earn a relatively higher
return by owning European bonds.
To be sure, there are risks to the current dynamic, including an
uncertain election outcome in the U.S. or a double-dip recession as
coronavirus cases mount. The U.K. and EU also remain at loggerheads
over a post-Brexit trade deal to replace a transitional agreement
that expires at the end of the year.
Lower yields have helped European governments raise funds at
record-low costs. Italy issued one of its mainstream government
bonds with a zero coupon for the first time on Oct. 13. The yield
on its benchmark 10-year debt reached an all-time low of 0.639% the
day after. The Greek equivalent also plumbed new depths, reaching
0.763%. Earlier this year, Italy's yield was close to 3% and
Greece's was above 4%.
Write to Anna Hirtenstein at anna.hirtenstein@wsj.com
(END) Dow Jones Newswires
October 20, 2020 07:59 ET (11:59 GMT)
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