Cash on hand could extend European bond rally

The region’s bonds are delivering the best returns ever for the start of a year as investors put money to work on expectations that the European Central Bank will stop raising rates soon. Even a flood of new bonds or the exit of the biggest buyer from the market were not enough to reduce gains.

“The multi-asset, real-money portfolio community is looking at 2023 as a year of fixed income“, wrote Jorge Garayostrategist of Societe Generale SA, in a note to clients. “It seems that real money is no longer afraid of central banks”.

The debt market Europe has just experienced the busiest week in its history and governments in the region are planning a net issuance of €500 billion in bonds this year, more than at any time this century.

In addition to scheduled bond offerings, countries including Italy, Austria, Ireland, Belgium, and Portugal have all held publicly syndicated sales, making the market rally even more prominent.

Money managers stood on the sidelines last year as central banks raised interest rates at the fastest pace on record, sending most benchmark yields up by a record. All that cash from maturing bond holdings hasn’t been put to work until now.

The index Bloomberg Euro Aggregate Treasury Index it is up more than 3% since the beginning of the year. That compares with almost 2% for the next best return on record, in 2008, in data going back to 1999.

Garayo says bond buyers were attracted by the recent rise in yields, when German 10-year rates hit an 11-year high in December. He said real money funds may be tempted to buy even more bonds if borrowing costs return to recent highs.

“Investors are cash rich at the beginning of the year.” Garayo said. “Such a strong uptake of the first wave of supply is not surprising.”