LONDON—Buyers lined up for auctions of government debt Thursday, helping drive down borrowing costs for countries across the euro zone and providing strong evidence that the wave of cash injected into lenders by the European Central Bank is finding its way to stressed governments.
If the pattern holds, it would be a sign that one of the euro zone's most acute problems—the risk of a sudden drought of financing for Italy—is fading.
Yet there still are other problems, among them overhauling government budgets and persuading banks to lend to businesses and consumers.Both are vital to generating confidence and economic growth.
But Thursday, at least, investors were optimistic.
Spain attracted €11.5 billion ($15.3 billion) in bids for two-, three- and four-year bonds, and it sold €4.5 billion worth, leaving the auction nearly three times oversubscribed.
Most popular were the two-year bonds, for which Spain paid an average yield of 2.07%. In November, Spanish two-year debt commanded 6%.
The ECB's Long-Term Refinancing Operation, or LTRO, put €530 billion in the hands of euro-zone banks. That money doesn't have to be paid back for three years and carries an interest rate of just 1%, making the two-year bond an attractive option.
The sunny sentiment shone beyond Spain. France sold €8 billion of five-year and longer bonds, and paid less in interest on each series than it had at the previous auction. Investors scooped up paper in the secondary market, too.
Yields on the two-year Italian bond were 1.79% Thursday evening in London, against 2.19% Wednesday, according to Tradeweb.
"We've seen very strong demand coming on the back of the LTRO," said Greg Arkus, head of sovereign, supranational and agency-debt capital markets at Credit Suisse in London.
The lower yields signal a lower risk of the euro zone's doomsday case: a sudden cessation of private lending to a big government borrower like Italy, which intends to raise €440 billion this year.
Such a stop could happen if bondholders feared there would be no one to whom they could sell their bonds if they wanted to get out. Spikes in Italian bond yields last summer and at the end of last year raised fear that such a halt was almost at hand.
The euro zone has no credible backstop fund that could provide for Italy's needs for more than, perhaps, a year or two, despite months of effort to build one.
As a result, it is imperative to coax private investors to keep funds flowing.The ECB lending has clearly greased the wheels.
Analysts at UBS estimated Thursday that roughly €100 billion of the €530 billion the ECB lent this week will go to the so-called carry trade, in which banks use the inexpensive loans to buy higher-yielding government bonds.
The analysts said most such trading is likely to take place among Spanish and Italian banks, and several big European lenders—including Italy's Intesa Sanpaolo SpA—have said they are doing just that.
There is precedent. ECB data show Spanish and Italian banks' holdings of government debt increased sharply in January, after the first round of three-year loans in December.
Regardless of the extent to which banks are buying government debt, the perception that they are—or that they at least have the cash ready to do so—has given confidence to a broader array of investors.
"Expectations of bank support now are getting priced into the market," said the head of European sovereign-bond trading at a global bank. "That's encouraging real money to get involved."
The bond-trading executive said nonbank investors such as asset managers, pension funds, insurers and the like have accounted for a large portion of the purchases of southern European bonds in recent weeks.
And there are preliminary signs that nonbank investors from outside Europe are starting to tiptoe back into the market.
Asian investors, for example, have been picking up French government bonds in the secondary market, he added. Particularly in recent days, the positive sentiment also has spread to longer-dated bonds, an additional sign of confidence.
It is one thing to borrow from the ECB for three years and lend to Italy for two; it is another to lend for 10. Still, prices of Italian 10-year debt strengthened notably Thursday.
The yield, which moves inversely to the price, fell to 4.97% late Thursday from 5.21% on Wednesday, according to Tradeweb.
Money manager BlackRock Inc. began "deliberately" adding to positions in Italian government bonds back in November, said Rick Rieder, chief investment officer of BlackRock's Fundamental Fixed Income portfolios, which oversees $615 billion in assets.
"We've added to the name and we've been comfortable growing positions," Mr. Rieder said. "Now you're starting to see others come into Italy as the curve normalizes and people get a sense [that] the potential shock risk and refinancing risk are much more muted," he said.
wsj.com
If the pattern holds, it would be a sign that one of the euro zone's most acute problems—the risk of a sudden drought of financing for Italy—is fading.
Yet there still are other problems, among them overhauling government budgets and persuading banks to lend to businesses and consumers.Both are vital to generating confidence and economic growth.
But Thursday, at least, investors were optimistic.
Spain attracted €11.5 billion ($15.3 billion) in bids for two-, three- and four-year bonds, and it sold €4.5 billion worth, leaving the auction nearly three times oversubscribed.
Most popular were the two-year bonds, for which Spain paid an average yield of 2.07%. In November, Spanish two-year debt commanded 6%.
The ECB's Long-Term Refinancing Operation, or LTRO, put €530 billion in the hands of euro-zone banks. That money doesn't have to be paid back for three years and carries an interest rate of just 1%, making the two-year bond an attractive option.
The sunny sentiment shone beyond Spain. France sold €8 billion of five-year and longer bonds, and paid less in interest on each series than it had at the previous auction. Investors scooped up paper in the secondary market, too.
Yields on the two-year Italian bond were 1.79% Thursday evening in London, against 2.19% Wednesday, according to Tradeweb.
"We've seen very strong demand coming on the back of the LTRO," said Greg Arkus, head of sovereign, supranational and agency-debt capital markets at Credit Suisse in London.
The lower yields signal a lower risk of the euro zone's doomsday case: a sudden cessation of private lending to a big government borrower like Italy, which intends to raise €440 billion this year.
Such a stop could happen if bondholders feared there would be no one to whom they could sell their bonds if they wanted to get out. Spikes in Italian bond yields last summer and at the end of last year raised fear that such a halt was almost at hand.
The euro zone has no credible backstop fund that could provide for Italy's needs for more than, perhaps, a year or two, despite months of effort to build one.
As a result, it is imperative to coax private investors to keep funds flowing.The ECB lending has clearly greased the wheels.
Analysts at UBS estimated Thursday that roughly €100 billion of the €530 billion the ECB lent this week will go to the so-called carry trade, in which banks use the inexpensive loans to buy higher-yielding government bonds.
The analysts said most such trading is likely to take place among Spanish and Italian banks, and several big European lenders—including Italy's Intesa Sanpaolo SpA—have said they are doing just that.
There is precedent. ECB data show Spanish and Italian banks' holdings of government debt increased sharply in January, after the first round of three-year loans in December.
Regardless of the extent to which banks are buying government debt, the perception that they are—or that they at least have the cash ready to do so—has given confidence to a broader array of investors.
"Expectations of bank support now are getting priced into the market," said the head of European sovereign-bond trading at a global bank. "That's encouraging real money to get involved."
The bond-trading executive said nonbank investors such as asset managers, pension funds, insurers and the like have accounted for a large portion of the purchases of southern European bonds in recent weeks.
And there are preliminary signs that nonbank investors from outside Europe are starting to tiptoe back into the market.
Asian investors, for example, have been picking up French government bonds in the secondary market, he added. Particularly in recent days, the positive sentiment also has spread to longer-dated bonds, an additional sign of confidence.
It is one thing to borrow from the ECB for three years and lend to Italy for two; it is another to lend for 10. Still, prices of Italian 10-year debt strengthened notably Thursday.
The yield, which moves inversely to the price, fell to 4.97% late Thursday from 5.21% on Wednesday, according to Tradeweb.
Money manager BlackRock Inc. began "deliberately" adding to positions in Italian government bonds back in November, said Rick Rieder, chief investment officer of BlackRock's Fundamental Fixed Income portfolios, which oversees $615 billion in assets.
"We've added to the name and we've been comfortable growing positions," Mr. Rieder said. "Now you're starting to see others come into Italy as the curve normalizes and people get a sense [that] the potential shock risk and refinancing risk are much more muted," he said.
wsj.com
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