Banks are becoming the leading buyers of some euro zone governments’ bond sales, taking advantage of surging interest rates as the European Central Bank looks to reduce its presence in the market.
Euro zone governments need private buyers to pick up some 400 billion euros ($422 billion) of additional debt this year.
Funding needs remain high due to the energy shock that followed Russia’s invasion of Ukraine, while the ECB, a huge buyer in recent years, will soon start reducing the bonds it holds on its 8 trillion euro balance sheet as it tightens monetary policy to contain inflation.
Heavy central bank buying had kept borrowing costs and volatility low for years, so the key question now is who steps in as the ECB steps out.
Sales of bonds directly to end investors by bank syndicates so far this year show bank treasuries buying a much larger share of some countries’ debt, according to data from debt agencies and Refinitiv’s IFR, as surging interest rates boost the appeal of government bonds.
“In many transactions, they are the largest buyers,” said Pierre Blandin, global head of sovereign, supranational and agency debt capital markets at Credit Agricole CIB, which has arranged many of this year’s deals.
Funding officials said bank treasuries usually buy bonds that mature in up to 10 years, but such is demand that they have become the leading investors in much longer-dated debt sales.
They were the top buyers in the European Union’s debt sale this month, buying almost 50% of a seven-year bond and 35% of a 20-year bond. Last September, they bought 26% of a five-year bond and 21% of a 30-year, far behind fund managers in second place.
Banks also took 39% of an Italian 20-year debt sale in January, while fund managers took 25%. In a 16-year debt sale last year, banks bought 29%.
“Demand from the bank treasuries in the deals is actually even stronger than what is seen in the statistics, as they generally get allocated a lower (share) of their orders than some other investors,” said Belgium debt agency director Maric Post.
Bank treasuries took 30% of a 30-year Belgian debt sale in February, versus 10% a year ago.
The data does not give a breakdown of which exact banks are involved, but banks tend to buy the government debt of their home country.
The pool of negative-yielding euro area government bonds, which stood at almost 50% of the market in January 2022, has disappeared as rates rise sharply. Across Europe, bond yields are at multi-year highs.
Banks have to hold a certain amount of high-quality liquid assets, cash and government bonds, as a liquidity buffer for regulatory reasons.
As bond yields rise relative to swap rates, it becomes more attractive for their treasuries to buy bonds rather than hold cash, said Daniel Gilliot, senior asset and liability management officer at BNP Paribas Fortis in Brussels.
The swap rate is the fixed rate investors pay to hedge against interest rate risk by receiving floating-rate payments.
Investors such as banks often pay the swap rate and hedge their exposure when buying these bonds, so higher bond yields also make that hedging cost more palatable, analysts said.
“I think we bought this year more (bonds) than the whole of last year,” Gilliot said.
Some banks have other incentives to buy more bonds. Italy’s Intesa Sanpaolo bought some 10 billion euros in government bonds in early 2023 to replace risk-weighted assets it had cut.
Whether bank treasuries broaden out their buying remains to be seen, however. The share of bonds they bought in government syndications is up around 2 percentage points across the bloc this year, still second place to asset managers, Deutsche Bank said.
It notes that buying by asset managers is down seven percentage points, while demand from pension funds and insurers was broadly unchanged.