Eurozone Government Bond Supply Will Be Huge Again in 2025 But So Will Demand
High supply could mean a risk of temporary volatility in bonds
Government bond supply in the eurozone will remain at very high levels in 2025 but analysts expect ample demand from investors seeking decent yields and safe-haven assets.
Analysts expect gross bond supply across the eurozone’s 11 largest issuers for 2025 will total roughly 1.28 trillion euros ($1.353 trillion). This includes new bond issuance to finance budget deficits and redemptions, or the renewal of maturing bonds.
Although marginally below 2024’s level, bond issuance will remain extremely high by historical standards due to the need for extra spending in previous years related to the Covid pandemic and Russia’s invasion of Ukraine.
High supply could mean a risk of temporary volatility in bonds, leading to higher yields. Overall, however, appetite to buy eurozone bonds is expected to be sufficient.
Yields remain relatively high, the European Central Bank is expected to cut interest rates, and investors still want to buy safe assets due to geopolitical uncertainty.
“For investors searching for yields, European bonds are appealing given risks of secular [long-term] stagnation in the continent,” said Benjamin Melman, global chief investment officer at Edmond de Rothschild Asset Management.
French government bonds could be an exception, however, given political instability in the country and uncertainty over the budget.
Edmond de Rothschild cut all exposure to French government bonds even before the recent collapse of the government. It otherwise considers that European government bonds offer good value.
Antonio Cavarero, head of investment at Generali Asset Management, said higher rates and cheaper bonds will attract more buyers, including retail investors.
The market is “aware of the incoming supply” and bond prices already largely reflect this, he said.
In line with historical patterns, issuance is expected to be highest at the beginning of the year, when countries start their annual funding programs, and gradually slow as the year progresses.
Supply pressures might emerge in times when large issuance volumes coincide, potentially causing lower prices and higher yields but this is only expected to be temporary.
“There could be some occasions for local noisy volatility and underperformance that, however, should remain relatively limited,” Cavarero said.
Investors have ample liquidity to put at work, he said. Governments have also been refining their funding strategies for years, diversifying their funding beyond conventional bonds to other instruments, including treasury bills, or relying more on retail investors.
Demand for bonds is expected to be strong enough even as the European Central Bank reduces its balance sheet through quantitative tightening. From the start of 2025, the central bank will no longer reinvest maturing bonds from previous bond-buying programs.
Elevated gross government bond supply is nothing new. However, a spike in what is known as ‘net-net’ government bond issuance to a record high presents a challenge.
This is the amount of bond supply for which new investors have to be sought. Net issuance is the volume of bond supply minus redemptions and net-net factors in the ECB’s quantitative tightening policy.
Erjon Satko, rates strategist at Bank of America, expects ‘net-net’ supply to reach a new record for the eurozone government bond market of around 670 billion euros. He expects this will be absorbed, as long as rates volatility stabilizes further, especially given the eurozone’s high savings rates.
John Hardy, Saxo’s chief macro strategist, said that in the unlikely event that the eurozone bond market turns unstable he would expect the ECB to find a way to stabilize the market.
“I just don’t think any major disruptive situation will happen. If there is any sign of tensions, some facility will be invented,” he said.