Frankfurt, Feb. 28 (BNA): Banks have become the main buyers of some eurozone governments’ bond sales, taking advantage of rising interest rates as the European Central Bank looks to reduce its presence in the market.
Eurozone governments need private buyers to raise about 400 billion euros ($422 billion) in additional debt this year.
Financing needs remain high due to the energy shock that followed Russia’s invasion of Ukraine, while the European Central Bank, a huge buyer in recent years, will soon begin to cut down on the €8tn of bonds it holds on its balance sheet as it tightens monetary policy to contain inflation. .
Heavy central bank buying has kept borrowing costs and volatility low for years, Reuters reports, so the key question now is who gets involved with the ECB’s exit.
Bond sales to end investors by bank syndicates so far this year show bank Treasuries buying a much larger share of some countries’ debt, according to debt agencies and Refinitiv’s IFR data, as higher interest rates boost the attractiveness of government bonds.
“In a lot of transactions, they are the biggest buyers,” said Pierre Blandin, global head of sovereign and transnational capital markets and agencies at Credit Agricole CIB, which arranged many of the deals this year.
Finance officials said that bank Treasuries usually buy bonds that mature in a period of up to 10 years, but that demand has caused them to become the main investors in long-term debt sales.
They were the biggest buyers in the EU debt sale this month, buying nearly 50% of seven-year notes and 35% of 20-year notes. Last September, they bought 26% of five-year notes and 21% of 30-year notes, far behind fund managers in second place.
“In a lot of transactions, they are the biggest buyers,” said Pierre Blandin, global head of sovereign and transnational capital markets and agencies at Credit Agricole CIB, which arranged many of the deals this year.
Finance officials said that bank Treasuries usually buy bonds that mature in a period of up to 10 years, but that demand has caused them to become the main investors in long-term debt sales.
They were the biggest buyers in the EU debt sale this month, buying nearly 50% of seven-year notes and 35% of 20-year notes. Last September, they bought 26% of five-year notes and 21% of 30-year notes, far behind fund managers in second place.
Banks are required to hold a certain amount of high-quality liquid assets, cash and government bonds, as a store of liquidity for regulatory reasons.
With bond yields rising relative to swap rates, it becomes more attractive to buy Treasuries rather than holding cash, said Daniel Gilliott, chief asset and liability management officer at BNP Paribas Fortis in Brussels.
A swap rate is the fixed rate that investors pay to hedge interest rate risk by receiving payments at a floating rate.
Analysts say that investors such as banks often pay the swap rate and hedge their exposure when buying these bonds, so higher bond yields make this cost of hedging more palatable.
“I think we bought more (bonds) this year than all of last year,” Gilliot said.
Some banks have other incentives to buy more bonds. Italy’s Intesa Sanpaolo (ISP.MI) bought about €10 billion of government bonds in early 2023 to replace the risk-weighted assets it cut.
However, it remains to be seen if Bank Treasuries expand their range of purchases. Deutsche Bank said the share of bonds they bought in government syndicated loans rose about two percentage points across the bloc this year, still second to asset managers.
He notes that buying by asset managers fell seven percentage points, while demand from pension funds and insurance companies was broadly unchanged.
Rial