Euro zone governments sold a record amount of bonds directly to investors in January, seeing the highest demand ever, as hopes grow for interest rate cuts to support a weakening economy.
This is in stark contrast to worries around high government funding needs in 2023, especially in the United States, which sparked a bond rout and pushed borrowing costs to their highest in over a decade in October.
Euro area states raised a record 73 billion euros ($79.1 billion) from syndicated bond sales in January, LSEG IFR data to Jan. 30 shows. Syndications are closely watched to gauge demand as governments sell bonds directly to investors. At an auction, bonds are first sold to banks.
Around 725 billion euros of demand exceeded that funding by a record 10 times, Reuters calculations using data from debt management offices and IFR show.
Data on Tuesday showed the euro zone economy stagnated last year. Money markets have priced in a first European Central Bank rate cut in April, boosting sentiment towards bonds.
The scale of demand at government bond sales in January surpassed that seen during the COVID-19 pandemic, when the ECB bought trillions of euros of debt to hold down borrowing costs.
"It was certainly somewhat of a surprise given the fact that everyone was talking about the wall of supply that was coming," said Belgium's debt agency director Maric Post.
Belgium saw a record 75 billion euros of demand for a 10-year bond on Jan. 9, raising 7 billion euros.
Another notable deal was Spain's, which saw the highest ever demand for an individual government bond at 138 billion euros and raised 15 billion euros from the 10-year debt sale, one of its two largest issuances in history.
Lee Cumbes, head of debt capital markets EMEA at Barclays, said that a year-end bond rally, when many investors had already closed their books, meant those who missed out were now readjusting positions by participating in the debt sales.
Belgium's Post added there was "probably an underestimation of the amount of money that was already waiting to be invested".
Bond markets posted their biggest two-month rally on record in November-December, rebounding from their earlier rout.
Some longer-term investors have put in larger orders for the deals than last year, Barclays's Cumbes noted.
OUT OF THE WOODS?
Many governments saw higher demand from investors outside the euro zone, BofA said, highlighting the potential for the bloc to draw back foreign investors as it leaves behind its negative rates era.
For all the worries around high funding needs, investors noted governments paid limited additional yield on outstanding bonds to lure buyers.
"Because of the strong demand... sovereigns have not had to offer an excess issuance premium to get their substantial issuance volumes away," said Roger Hallam, global head of rates at Vanguard, which manages $8.2 trillion in assets, favouring Spanish and Greek bonds.
With the euro area home to some of the world's largest government bond markets, the strong investor appetite is a good sign globally as near-record funding needs challenge borrowers.
As the ECB reduces its bond holdings, markets may have to absorb a record 675 billion euros of the bloc's debt, Barclays estimates.
U.S. Treasury yields fell on Monday after the government said it expects to borrow less during the first quarter than initially forecast. Monetary policy uncertainty in Japan has weakened demand for its bond sales.
Traders were cautious, noting that auctions, where governments sell most of their bonds, have not gone as well.
"That doesn't really resonate the same message (as the syndications)," said BofA's head of EMEA linear rates trading Kal El-Wahab.
He said that metrics such as the average cutoff price - the lowest price accepted for an auction - and the level of overbidding - how much higher the bonds price relative to those outstanding - are lower than last year's average.
With demand for bonds high, investors also warn that hedge funds, which only receive a small share of governments' debt sales, may be overstating their demand to get better allocations - a long-standing issue that skews demand figures.
Given uncertainty around elections and monetary policy this year, Barclays' Cumbes said he advised governments to get more of their funding done earlier.
"There's going to be a lot of activity, a lot of fundraising to do, a lot of countries competing for money," he added.
