Europe’s Record Cash Pile Set to Prime Next Stage of Bond Rally

An upcoming surge in euro-area bond sales should be more than swept up by therecord amount cash of sitting idly in the economy, potentially adding fuel to the rally sweeping across the region’s debt markets.

Next week, bond offerings in the eurozone are expected to rise five-fold, with Germany, Italy and France, among others issuing a combined 30 billion euros ($35.4 billion) worth of securities, according to Commerzbank AG. That’s still less than the amount of debt coming due.

The supply also comes as excess liquidity in the euro area ballooned past the 3-trillion-euro mark for the first time ever last week, thanks to unprecedented support from the European Central Bank.

The monetary authority’s liquidity injections have already pushed yields on some of the region’s riskiest borrowers to record lows. With speculation now growing that the ECB will expand and extend its program in December, demand for euro-area debt could prove solid at the auctions, spurring the next leg of the rally.

“The period from now until year-end does provide a fertile backdrop for further spread compression,” UBS Group AG strategists including Rohan Khanna wrote in a note to clients, referring to the yield premium between peripheral debt and German bunds.

While U.S. election uncertainty could lead to some volatility, “the ECB has enough firepower to fight against any unwarranted widening in spreads,” Khanna said.

Offering additional support will be around 41 billion euros of redemptions from Germany, Italy and Ireland, which will need to be reinvested. Meanwhile, coupon payments from these three nations and Portugal will total over 1 billion euros next week.

Budgets, Brexit

National finances will also be in focus. The deadline for governments to submit their 2021 draft budgets to the European Commission is Thursday. This has been a contentious issue in recent years, with Rome threatening to break strict EU spending guidelines.

The region as a whole has struggled to keep deficits in check this year, due to the economic fallout from the pandemic. But budget shortfalls in 2021 will be lowered, according to Puja Sawant, an analyst at Citigroup Inc.

Elsewhere, the European Council will hold a meeting on Thursday and Friday to discuss the latest Brexit trade developments. The summit however, will be a mere “stock-taking” exercise, which won’t get in the way of the negotiations, according to EU officials with knowledge of the discussions.

Next Week

  • Germany, Italy, France, Spain, Portugal and the Netherlands are set to sell a combined 30 billion euros worth of debt, according to Commerzbank

    • In the U.K., the Debt Management Office will sell almost 7 billion pounds of gilts across three conventional auctions and the Bank of England will buy back 4.4 billion pounds of debt in three operations
    • U.K. data also offers slim pickings with only employment and wage numbers due Tuesday
    • Isabel Schnabel also speaks on Monday as do Fabio Panetta and Luis de Guindos while chief economist Philip Lane, Yves Mersch and Francois Villeroy speak on Wednesday
      • BOE policy makers are set for a busier week. Governor Andrew Bailey is set to appear at the Citizens’ Panel Open Forum on Monday; Jonathan Haskel also speaks on the same day, while Andy Haldane speaks Wednesday followed by Jon Cunliffe on Thursday

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