Domestic investors could absorb heavy 2023 euro debt issuance – JPMorgan

11:41 am Tuesday, November 22nd, 2022

(Reuters) – Demand for euro zone government debt from domestic buyers crowded out by European Central Bank buying is expected to be strong enough in 2023 to absorb hefty debt sales, just as the ECB potentially retreats further as a key buyer, JPMorgan said in a note.

JPMorgan said it expected gross government bond issuance after factoring in ECB buying in the bloc to rise to 861 billion euros ($884 billion) in 2023 without the ECB running down its massive bond holdings and to 958 billion euros if it embarks on the debt run-off.

That is a sharp rise from the 627 billion euros JPMorgan expects at the end of 2022, as states fund energy support measures.

The ECB had absorbed governments’ debt issuance in the bloc since it began purchases in 2015, so an increase in issuance just as it backs out has raised questions over who will step in.

Since the second quarter of this year, when the ECB stopped its pandemic emergency bond purchase scheme, domestic credit institutions including banks and money market funds have stepped in as buyers in France, Italy, Spain and Greece, the JPMorgan note said on Tuesday.

It added that other domestic investors have become buyers across most euro area debt markets.

JPMorgan analysts expected demand to increase further next year as bond yields, after a surge this year as inflation soared and the ECB hiked interest rates, lure buyers.

“We believe that the pick-up in demand would be enough to absorb the heavy 2023 issuance and avoid any material widening in intra-EMU spreads,” rates strategists Elisabetta Ferrara and Aditya Chordia wrote in the note, referring to the additional yield member states pay over benchmark Germany.

JPMorgan said demand from pension funds and insurers, who had reduced investments in government bonds since the pandemic, could also increase next year, noting even modest demand could be enough to support long-dated debt issuance.

The decline in bond market volatility JPMorgan expects next year could also lure foreign buyers, who became net sellers of the debt during the period of ECB bond purchases, the bank said.

However, demand could easily be challenged due to political risks, a policy mistake by the ECB, or higher market volatility, JPMorgan added.

($1 = 0.9739 euros)

(Reporting by Yoruk Bahceli; editing by Dhara Ranasinghe and Emelia Sithole-Matarise)