Rush for Yield Sends European Bond Market Soaring

Demand for Europe’s debt sales is running at a record pace as investors clamor to lock in attractive yields before central banks start cutting interest rates.

So far in January, investors have bid about €1.04 trillion (US$1.13 trillion), or 4.64 times the €224.86 billion equivalent of syndicated debt sales in the region, from issuers including France, Banco Santander SA, and Enagas SA, according to data compiled by Bloomberg.

That’s the biggest-ever flow of money in to the market at the start of a year, reached about 10 days quicker than the previous record set in 2021. In the case of the sovereign supply, it comes even as scrutiny of swollen public debt burdens intensifies.

“It’s a mix of large ETF [exchange-traded funds] inflows and real money investors having excess cash to deploy,” said Daniel Ender, a portfolio manager at Robeco. “In some cases, investors were short risk, and demand for high beta stuff has been particularly elevated.”

The biggest orders have been for the latest crop of syndicated sovereign sales, led by Italy’s two-part €15 billion offering. Including France’s 25-year green bond sale on Tuesday, demand for sovereign debt alone has already reached €550 billion this month, data compiled by Bloomberg show.

“We’ve seen pretty much every piece of supply come with strong demand this year,” said Ed Hutchings, head of rates at Aviva Investors, when discussing the sovereign sales. The firm’s global sovereign bond fund participated in Spain’s transaction, which Hutchings said offered good value compared to France.

Here is a breakdown of order book sizes:

As is typical for January, issuers from across the ratings spectrum are attempting to get deals done. Around 140 borrowers have issued bonds this month in euros, pounds, and in the dollar Reg S market, including Schaeffler AG, high-yield rated car-parks operator Q-Park, and financial institutions including Toronto-Dominion Bank and Santander UK, data compiled by Bloomberg show. It’s likely many are front-loading planned 2024 funding to avoid potential periods of volatility later in the year as central banks eye rate cuts and national elections get under way in the UK and U.S..

Average yields on euro-denominated company bonds have risen to about 3.7 percent, in a slight unwind of 2023’s late-year rally when spreads plunged as expectation grew for multiple rate cuts this year.

“The deal flurry is certainly related to the sharp decline in both credit spreads and sovereign yields,” Robeco’s Ender said. “Refinancing for companies has become considerably cheaper now vis-a-vis a couple of months ago.”

Issuers will be watching closely how demand evolves. While expectations of rate cuts have galvanized demand for this early wave of sales, investors have sharpened their focus on swollen public debt burdens and the premium needed to compensate them for holding long-term bonds in particular.

Charles-Henry Monchau, chief investment officer of wealth management firm Bank Syz, has a long-term bearish view on all Group-of-Seven government bonds, especially U.S. Treasuries, because he thinks high debt loads will lead to long-term financial repression, or negative real yields.

“They’ve been piling up debt for years and years. At some point, the bills will come due,” he said. “The way they can deal with this is not going to be default, obviously, but they’ve got to compensate investors with higher yields and they will probably have to debase their currency.”

The price also has to be right for corporate issuers to get deals done, as Credit Mutuel Arkea SA discovered on January 9, when it decided not to proceed with a tier 2 offering after setting final terms on the €500 million sale at 215 basis points above midswaps.

“We had an ambitious price objective. What we underestimated was the supply,” said Stefane Cadieu, Credit Mutuel Arkea’s managing director of capital markets, in an interview. “There were 11 transactions that day, and some of that supply had much higher yields in a market that was very risk-on.”

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