Spain secures 5 billion euros at 1.45% interest rate... Italy's 10-year government bond yield hits record low
[Asia Economy Reporter Park Byung-hee] European countries are successfully securing funds through consecutive long-term government bond auctions. Despite increased fiscal deficits of various governments in response to COVID-19 last year, the European government bond market remains stable. Analysts suggest that the European Central Bank's (ECB) 'Pandemic Emergency Purchase Programme (PEPP)' and recent signs of political stability in Italy are acting as positive factors.
According to major foreign media on the 9th, the Spanish government auctioned 50-year maturity bonds on the same day, raising 5 billion euros. The funds attracted to the auction exceeded 65 billion euros, showing a competition ratio of over 13 to 1. The winning bid yield was 1.45%.
Investment bank UniCredit explained that investment banks led the Spanish 50-year bond auction for the first time since 2016, when the winning bid yield was 3.45%. Compared to then, the Spanish government secured funds at an interest rate 2 percentage points lower.
Portugal also auctioned 30-year maturity bonds last week, raising 3 billion euros. More than 40 billion euros flooded in, resulting in a competition ratio exceeding 13 to 1, and the funding yield was also low at 1.1%.
Belgium issued 50-year maturity bonds last week, securing 5 billion euros with a winning bid yield of only 0.65%. Last month, France issued 7 billion euros worth of 50-year maturity bonds at a 0.5% interest rate.
European government bonds are strong not only in the primary issuance market but also in the secondary market. The yield on Italy’s 10-year government bonds fell to a historic low of 0.5% on the same day.
The strength of Italian and Spanish government bonds, which have lower credit ratings than Germany and France, is interpreted as a sign of stability in the European financial market.
The ECB is implementing the PEPP, purchasing government bonds worth 1.85 trillion euros until the end of March next year. Through the PEPP, the ECB buys hundreds of billions of euros worth of government bonds weekly, contributing to market stability.
Frederic Ducrozet of Pictet Asset Management stated that the ECB’s weekly purchase volume once exceeded 30 billion euros last year but has recently decreased to below 15 billion euros. Considering this, he explained that the recent strength of Italian government bonds appears to be due to expectations of political stability in Italy.
Italy fell into political turmoil last month after the coalition government collapsed, but former ECB President Mario Draghi has been nominated as the prime minister candidate and is currently working on forming a new coalition government.
Ducrozet said, "Investors believe that the coalition government led by former ECB President Draghi will be favorable to the European Union (EU)’s reform policies, which will also help Italy’s economic growth."
Italy announced plans to secure up to 9 billion euros through three medium-term government bond auctions this week.
Italy’s gross domestic product (GDP) shrank by 8.8% last year, the worst since World War II. The government debt-to-GDP ratio increased from 135% to nearly 160%.
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