Europe’s Coming Bond Avalanche Will Test the ECB
Governments need to increase their borrowing this year at the same time as policymakers are tightening monetary conditions.
A debt avalanche looms in Europe.
Photograph: Three Lions/Hulton Archive via Getty Images.
European governments are set to unleash a deluge of bonds into markets this year. Investors will demand either a further shift higher in yields or a substantial improvement in the region’s inflation outlook to digest the coming wave of supply, adding to the already daunting monetary policy challenges facing the European Central Bank.
The 10 largest euro nations are expected to sell some €1.3 trillion ($1.38 trillion) of sovereign bonds this year. A little over half of that will be new money, after allowing for maturing debt. It's a scarily large jump in net new supply of around €340 billion, according to analysts at NatWest Group Plc. Adding to the pressure, the ECB’s quantitative tightening process starting in March will add at least an extra €150 billion of bonds markets will need to absorb this year.