European Bond Market May Look to ECB for Help Amid Supply Risks

Euro-area bond investors may seek signs of more central-bank support next week as they brace for the next wave of debt sales aimed at funding recovery efforts amid the coronavirus crisis.

Germany and France will update issuance plans on Monday — and it remains to be seen if they will stick to targets set earlier in the year. The market will be watching European Central Bank President Christine Lagarde’s address at Wednesday’s ECB and its Watchers conference for clues on a possible extension of the institution’s pandemic bond-buying program.

Such support has seen German bonds so far shrug off the prospect of the October-December borrowing target being lifted from the original estimate for 44.5 billion euros ($52 billion). The nation already issued more debt than expected in recent quarters. Investors are also on the lookout for another green bond from the country after its debut sale of such notes this month, according to comments made last month by Joerg Kukies, Germany’s Deputy Finance Minister.

“We will be looking at whether there is a reduction in the supply for the fourth quarter and if it will stick to the plan of introducing a new linker,” Jan Weber Ostergaard, senior analyst at Danske Bank A/S, wrote in a note.

Next up with a supply announcement will be France, which will advise on its 2021 issuance plans. The nation unveiled a 100-billion-eurostimulus plan earlier this month, of which 40% is expected to rely on European financing.

The market will have a couple of days to absorb these supply plans before the ECB Watches event, where speakers include ECB Chief Economist Philip Lane, Jens Weidmann, Francois Villeroy and Pablo Hernandez de Cos. The event was originally scheduled for March, before being postponed due to the virus outbreak.

Supply Outlook

Debt sales by the largest euro-area issuers including Germany, France, Italy, Spain, the Netherlands and Belgium are expected to fall by 90 billion euros next year due to an improvement in budget deficits, according to Societe Generale SA. This was after 450 billion euros of offerings were added to this year’s supply due to the coronavirus.

Euro-area issuance due next week from the region’s top four borrowers — Germany, France, Italy and Spain — is set to total close to 30 billion euros, according to Danske. Spain may sell a 10-year bond through banks after skipping an opportunity this week, according to Mizuho International Plc.

  • After Belgium pays almost 18 billion euros of redemptions next week, the next such payment by a euro-area Treasury isn’t scheduled until the middle of next month. Belgium also pays 2 billions euros of coupons, as does Italy which pays 500 million euros
  • The U.K. will offer a combined 8 billion pounds of three-, eight- and 21-year securities next week and the BOE will buy back 4.4 billion pounds of debt across three operations

Data in Focus

Among the coming week’s data releases, the euro area’s flash estimate for September consumer prices may grab some attention on Friday, after the gauge fell below 0% for the first time in four years last month. The median estimate in a Bloomberg survey is for another decline, which could put pressure on the ECB to avert deflation risks.

The latest report will come after a measure of market-based price expectations — as measured by five-year forward, five-year inflation swaps — fell by about 15 basis points from an August peak.

Alongside Germany and the U.K., the bloc will publish final manufacturing PMI figures for September on Thursday.

  • Germany will release state and national inflation readings for September on Tuesday as well as September unemployment numbers on Wednesday
    • Aside from the PMI data, the U.K. will also publish final second-quarter growth numbers on Wednesday
    • BOE Governor Andrew Bailey speaks to the Belfast Executive’s Club on Monday, for which there will be no text published. Andy Haldane speaks at an economic summit on Wednesday, which will be accompanied by text

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