How 2019’s mammoth bond rally buoyed the entire eurozone
Return of ECB’s debt-buying programme plays central role
This year’s rally reached all corners of the eurozone’s sovereign bond market. Every member of the currency bloc has seen its 10-year bond yield hit an all-time low.
While Germany’s debt stole the headlines, with all of its bonds trading at sub-zero yields at one point during the year, countries generally considered riskier have performed even better. In former crisis spots such as Italy, Spain, Portugal and Greece, spreads over German debt -— a measure of how risky investors consider these bonds — tightened to record lows. As German Bunds, which serve as a benchmark for the euro area, gave up some of their gains in the autumn, these countries have outperformed.
One driver of this trend is a return of relative political stability, and comparatively healthy growth to what became known as the eurozone “periphery” during the debt crisis. But a far bigger driver has been investors’ desperation for higher-yielding bonds in a market where more than $11tn of debt continues to trade at a negative yield.
“When Bund yields are so low, investors are forced to go up the risk spectrum for returns,” said Rabobank strategist Lyn Graham-Taylor.
Many fund managers would prefer not to hold too much Italian debt, Mr Graham-Taylor said, given weak growth and the potential for political volatility. But a huge bond market with mostly above-zero yields is tough to ignore. At one point this year nearly two-thirds of all positive yielding debt in the eurozone was Italian. “A standard thing you hear from investors is that they hate the credit but they can’t avoid holding it,” Mr Graham-Taylor said.
The return of the European Central Bank’s bond-buying programme in November, after a nine-month hiatus, has further supported eurozone government bonds of all stripes. At the height of the eurozone crisis, “peripheral” bonds typically moved in the opposite direction to “core” debt such as Germany’s. This year, all markets have risen in unison.