Flurry of government debt deals from US, Italy, Macedonia and Oman find buyers Share on Twitter (opens new window) Share on Facebook (opens new window) Share on LinkedIn (opens new window) Save to myFT Kate Allen in London and Joe Rennison in New York 4 hours ago 1 For some sovereign debt investors, rising yields are not necessarily a case of bad news. A flurry of government debt deals from issuers as diverse as the US, Italy, Macedonia and Oman during the first full trading week since the Christmas break attracted strong demand from investors seeking to take advantage of the recent rise in long-term market interest rates. This highlights the tension within the fixed-income market between a strengthening economic cycle that reduces the need for stimulative central bank policy and drives up bond yields versus large amounts of cash seeking assets at the start of the year.
That demand was evident in sales of US Treasuries this week with $20bn of 10-year paper and $12bn in 30-year debt issued. The chunky debt sales came despite a sharp rise in yields on Wednesday which fanned concerns that bond markets face a torrid year. While some noted bond investors such as Bill Gross and Jeffrey Gundlach predicted a gloomy outlook for the market, investors sought Treasury paper at yields not seen since last March. “Bottom line, a 10-month high in yields brought out demand,” said Peter Boockvar, chief investment officer at Bleakley Financial Group. ‘’Since we’ve had depressed interest rates for so long, buyers bought that dip in price and jump in yields and took advantage.” Robust investor demand comes as the US Federal Reserve remains on course to raise overnight interest rates in March and is steadily reducing its balance sheet with tax reform seen boosting the economy.
Expectations of rising yields are not confined to the US. The European Central Bank has from the start of January halved its monthly buying of bonds to €30bn from €60bn. With the Bank of Japan this week surprising markets by buying fewer long-dated bonds than expected, investors around the world face the prospect of central banks retreating, seen paving the way for yields to rise further. Despite this, European governments drummed up €63bn of investor bids for three bond deals totalling €19bn on Wednesday, including Italy’s mammoth €9bn, 20-year bond. Recommended Emerging market sovereigns tap buoyant bond demand European sovereigns forced to scale back size of debt sales Bond funds hit by biggest outflows since Trump election Lee Cumbes, head of public sector debt Emea at Barclays, said: “Investors have returned in the new year with cash to put to work and are confident in the economic performance they see, with the scaling back of ECB QE not deterring them.” In emerging markets, Oman raised $6.5bn in three tranches of bonds this week, while several other emerging market countries also took advantage of the positive market conditions. Turkey raised $2bn in 10-year debt while Israel raised $2bn in 10-year and 30-year debt.
Nick Darrant, a senior debt capital markets banker at JPMorgan, said the series of transactions “confirms the bull run in EM is still in full swing”. “There have been significant inflows of cash into EM bond funds, which start the year with cash balances high,” he said. “The growth outlook continues to be robust and the stable outlook for commodities means that it is then a question of the supply-demand balance. Demand as evidenced in these first few days of the year looks good.”