Why Demand for Investment in European Bonds Is Growing
The fact that the ECB, through its programmes of the type of quantum easing (QE) and Pandemic Emergency Purchases Program (PEPP) respectively, provides the market with money, making it the main buyer of European government bonds, forces investors to create an informal queue to buy the remaining and smaller volume of European bonds offerings left after the ECB purchases.
Combined with the above fact that investors themselves are looking to withhold government European bonds in their long-lasting portfolios, this makes European bonds in increased demand and priority by investors. The increased artificial demand thus generated by the ECB attracts investors to its bond market.
This can be seen from the fact that when you look at 2020, European government bond issues showed record offers from investors despite the low size of the premium they offered.
The ECB, as the main buyer of European bonds on the secondary market, and through the implementation of its QE & PEPP programmes equally, manages to maintain control of the yield curve in Europe (Euro Yield Curve).
In this way it implies that it effectively removes the risk involved in European government bonds of default by their issuers and given that 40% of the public debt of the euro area member countries continues to remain in the portfolios of the respective central banks of the member countries.
The ECB may be the “beast” that buys massively European government bonds on the secondary market, but all the primary supply of these bonds is directed at classic investors alone.
The biggest challenge facing the ECB, like any central bank implementing QE programmes, is the exit strategy. This output usually has two steps:
1. The first step involves stopping net purchases on European government bonds.
2. The second step is the end of reinvestments or, in other words, the reduction of the ECB’s portfolio.
When the ECB starts to reduce the size of these programmes and the PEPP, this should be done gradually and in such a way as to avoid a massive sell-off.
In any case, the end of QE & PEPP programs will affect yields, but as they increase – government bond prices fall respectively – yields on these bonds will continue to be attractive again, if there are no concerns about the public debt/GDP ratios of some Eurozone member countries.
If there is such a problem, investors will move away from these member countries’ governmental bonds, increasing their spreads in the months to come.
In this case and given that there will be government bonds with low yields and limited volatility, then investors immediately gain the incentive to head their funds to higher yield bonds.
In general, European government bonds will remain attractive in the long term as the economies of the euro area member countries will be strengthened by the advent of the European Recovery Fund, whose disbursements will help fiscally the governments of the member-countries by offering an even greater reduction-shrinking in the size of the default risk included in them.
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