French, Belgian Debt Lures Buyers, Widening Gap with Struggling Peers
By Neelabh Chaturvedi
France and Belgium are reaping the rewards of the European Central Bank's rate cuts amid a scramble to buy their bonds in a search for yields, isolating fellow euro members such as Italy and Spain as investors continue to demand higher returns for the risk of holding their debt.
The rush into France and Belgium marks a turnaround for the two countries, which only recently suffered bond-market nerves of their own, and belies continuing economic stresses.
But as the safest end of the euro-zone government bond spectrum offers little to no yield, and as some investors even pay to park funds in Germany, the Netherlands and Finland, the so-called Franco-Belgian semi-core is attracting new fans.
"Belgium and France have returned to the core and or semi-core classification and are seeing real buying interest," said Padhraic Garvey, head of developed-markets debt strategy at ING.
"At the other extreme are Spain and Italy which are seeing real selling interest," he said.
Leaving funds on deposit at the ECB no longer offers any return, since the central bank slashed its deposit rate to zero earlier this month, setting bond investors on a hunt for yields in relatively safe countries.
Yields on shorter-dated bonds issued by Germany, the Netherlands and Finland--considered the euro zone's safest borrowers--have already moved into negative territory, essentially meaning that bond investors are paying these countries for the privilege of parking their funds.
The renewed strength in French and Belgian debt comes despite economic headwinds facing these countries, demonstrating that a hunt for yields rather than a fundamental economic shift is driving the move.
France faces challenges to pare its debt pile, boost competitiveness and spur growth. The International Monetary Fund Monday predicted that the French economy will grow by only 0.3% in 2012. Germany is tipped to grow by 1% in the same period.
Belgium, which last year beat Iraq's ignominious record of going the longest period without a central government, has made some progress in reducing its deficit since Prime Minister Elio Di Rupo formed a coalition. Still, its ratio of public debt to output is forecast to climb further above 100% in the coming years, according to the European Commission.
"We think the overriding reason why Belgium is performing strongly right now is because of the very strong performance of France, rather than any specific desire to pick up Belgium," said Peter Chatwell, an interest strategist at Credit Agricole in London.
Investors looking to make modest returns are therefore moving into the next tier of credit-worthy sovereign borrowers. The gush of flows, including some from hefty bond repayments in recent weeks, has sent French and Belgian bond yields, which have relatively secure debt ratings, tumbling.
French bonds maturing in two years offer a yield of just 0.02%, according to Tradeweb. The yield was as high as 0.90% at the end of April. The gains in bonds issued by Belgium have been even more impressive.
The two-year Belgian bond currently yields just 0.08% points, down from 1.20% at the end of April.
The sharp decline in Belgian and French borrowing costs highlights an unintended consequence of the cut in the ECB's policy rates to record lows. While the primary aim of the ECB's move to cut the deposit rate to zero was to spur lending to consumers and companies by deterring banks from parking their funds with the central bank, it has also increased the yield gap between Italian and Spanish debt and the rest of the euro zone.
For much of the second half of last year, French, Austrian and Belgian yields moved in tandem with Italian and Spanish bond yields, as investors treated them as if they were experiencing similar strains. That link has now been broken, at least for the time being.
Investors are demanding an extra 385 basis points of yield to buy two-year bonds issued by Italy, the euro zone's third-largest economy, instead of similar-dated Belgian bonds. The corresponding premium for Spanish debt is 454 basis points.
Investors continue to remain wary of buying Italian and Spanish debt, fueling concerns over the ability of these countries to keep borrowing funds at sustainable rates and raising doubts over the fire-fighting capabilities of the euro area's rescue funds.
By Neelabh Chaturvedi
France and Belgium are reaping the rewards of the European Central Bank's rate cuts amid a scramble to buy their bonds in a search for yields, isolating fellow euro members such as Italy and Spain as investors continue to demand higher returns for the risk of holding their debt.
The rush into France and Belgium marks a turnaround for the two countries, which only recently suffered bond-market nerves of their own, and belies continuing economic stresses.
But as the safest end of the euro-zone government bond spectrum offers little to no yield, and as some investors even pay to park funds in Germany, the Netherlands and Finland, the so-called Franco-Belgian semi-core is attracting new fans.
"Belgium and France have returned to the core and or semi-core classification and are seeing real buying interest," said Padhraic Garvey, head of developed-markets debt strategy at ING.
"At the other extreme are Spain and Italy which are seeing real selling interest," he said.
Leaving funds on deposit at the ECB no longer offers any return, since the central bank slashed its deposit rate to zero earlier this month, setting bond investors on a hunt for yields in relatively safe countries.
Yields on shorter-dated bonds issued by Germany, the Netherlands and Finland--considered the euro zone's safest borrowers--have already moved into negative territory, essentially meaning that bond investors are paying these countries for the privilege of parking their funds.
The renewed strength in French and Belgian debt comes despite economic headwinds facing these countries, demonstrating that a hunt for yields rather than a fundamental economic shift is driving the move.
France faces challenges to pare its debt pile, boost competitiveness and spur growth. The International Monetary Fund Monday predicted that the French economy will grow by only 0.3% in 2012. Germany is tipped to grow by 1% in the same period.
Belgium, which last year beat Iraq's ignominious record of going the longest period without a central government, has made some progress in reducing its deficit since Prime Minister Elio Di Rupo formed a coalition. Still, its ratio of public debt to output is forecast to climb further above 100% in the coming years, according to the European Commission.
"We think the overriding reason why Belgium is performing strongly right now is because of the very strong performance of France, rather than any specific desire to pick up Belgium," said Peter Chatwell, an interest strategist at Credit Agricole in London.
Investors looking to make modest returns are therefore moving into the next tier of credit-worthy sovereign borrowers. The gush of flows, including some from hefty bond repayments in recent weeks, has sent French and Belgian bond yields, which have relatively secure debt ratings, tumbling.
French bonds maturing in two years offer a yield of just 0.02%, according to Tradeweb. The yield was as high as 0.90% at the end of April. The gains in bonds issued by Belgium have been even more impressive.
The two-year Belgian bond currently yields just 0.08% points, down from 1.20% at the end of April.
The sharp decline in Belgian and French borrowing costs highlights an unintended consequence of the cut in the ECB's policy rates to record lows. While the primary aim of the ECB's move to cut the deposit rate to zero was to spur lending to consumers and companies by deterring banks from parking their funds with the central bank, it has also increased the yield gap between Italian and Spanish debt and the rest of the euro zone.
For much of the second half of last year, French, Austrian and Belgian yields moved in tandem with Italian and Spanish bond yields, as investors treated them as if they were experiencing similar strains. That link has now been broken, at least for the time being.
Investors are demanding an extra 385 basis points of yield to buy two-year bonds issued by Italy, the euro zone's third-largest economy, instead of similar-dated Belgian bonds. The corresponding premium for Spanish debt is 454 basis points.
Investors continue to remain wary of buying Italian and Spanish debt, fueling concerns over the ability of these countries to keep borrowing funds at sustainable rates and raising doubts over the fire-fighting capabilities of the euro area's rescue funds.
No comments:
Post a Comment