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European governments are curbing their sales of long-term sovereign bonds, as they shift towards shorter-term funding to limit the damage from a rise in borrowing costs.
The average maturity of debt sold across big Eurozone markets including Germany, France and Italy is expected to dip below 10 years for the first time since 2015 this year, according to a Barclays forecast based on government issuance trends. In the UK, the bank expects an average maturity of roughly 8.8 years, the lowest this century.
The figures underline how countries’ debt managers are responding to waning appetite for long-term debt from traditional buyers such as pension funds. This month, the Netherlands completed a sweeping overhaul of its €1.8tn pension system that is expected to sap demand for long-term debt. Economies such as the UK have also experienced shifts away from the defined-benefit pension systems that were once almost insatiable buyers of long-dated bonds.
“Structural demand has fundamentally changed,” said Stephen Jones, global chief investment officer at Aegon Asset Management. “You’ve removed the forced-buyer base and indeed begun to unwind it.”
The picture is a stark change from a decade ago, when European governments were rushing to lock in low borrowing costs by issuing ultra-long-dated bonds — sometimes not maturing for as much as 100 years. “We were at an extreme, the pendulum is swinging back,” Jones said.
Short-term borrowing is typically cheaper for governments, meaning they can cut their interest bill by eschewing long-dated issuance. However, relying on shorter maturities — something the US has done in recent years — leaves public finances more exposed to swings in interest rates as the debt needs to be regularly refinanced.
But the gap between two-year and 10-year borrowing costs has widened sharply in the past two years in big European economies amid a global glut of issuance.
April LaRusse, head of investment specialists at Insight Investment, said debt managers moving to shorten maturities were “coming to the rescue” of countries dealing with a drop in demand for their long-term debt.
Max Kitson, analyst at Barclays, said the scaling back of the maturity of sovereign debt issuance was in part a response to “heavy volumes of issuance coming down the pipeline”. Barclays forecasts a €100bn increase in gross debt sales across the EU sovereigns this year.
A sell-off this week in Japanese debt has spread to bond markets around the world, in the latest sign of investors’ worries over record borrowing by rich nations.
The Eurozone market has also been transformed by Germany’s landmark announcement last year that it would loosen its constitutional borrowing limit to make way for a huge increase in infrastructure and defence spending.
The debt brake had created a shortage of the country’s debt that had suppressed its borrowing costs and supported its status as the bloc’s safest borrower. The “scarcity of Bunds is definitely over”, declared the country’s debt chief in June.
German Bund yields — the benchmark for long-term government borrowing in the Eurozone — have climbed sharply since the spending plan, as investors brace for a surge in issuance as well as stronger economic growth. Its 30-year yields are hovering close to 3.5 per cent, levels not previously seen for more than a decade.
Jason Borbora-Sheen, portfolio manager at investment manager Ninety One, said: “Supply-demand dynamics are a key consideration for pricing government bonds, in particular with fiscal concerns increasingly influencing market behaviour.”
In the UK, the Debt Management Office’s actions to cancel some auctions of long-term debt and announce a consultation on expanding the market for Treasury bills — debt maturing within one year — were a vital reason why the November Budget landed calmly with the market, investors argue.
Matthew Amis, investment director at Aberdeen Investments, said that while the Budget had “calmed some nerves”, the DMO’s actions were in his view the more important catalyst behind the recent outperformance in gilts.