More than ever, the bond market is the most important source of funding for states - especially in the current virus crisis. Only a few days ago, the deputy chief warned European Central Bank (ECB), Luis de Guindos, before a hasty withdrawal of corona aid for the euro zone. Stopping government aid too early could trigger a wave of bankruptcies, emphasized the deputy of central bank chief Christine Lagarde. The ECB has officially given the euro countries carte blanche to get even more debt. For the financial markets, this means that the states will continue to issue bonds on favorable terms, as they can be sure that the ECB will buy a large part of them anyway. Against this background, the “Wiener Zeitung” took the latest statements by the ECB Vice President as an opportunity to talk to local financial experts about the current trends in the market for government bonds.
“The aid measures will further increase the debt level and the budget deficits will increase even further,” says Markus Duernberger, senior asset manager at the Spängler bank. The expert attributes the fact that the enormous financial efforts of the states are at all possible with their Corona aid to the central banks, which this time would have taken even more extensive measures compared to previous crises such as the global financial crisis and the euro debt crisis. "In this way, key interest rate cuts, bond purchase programs and credit lines for banks enable states to take out long-term and affordable debt," Duernberger explains.
Great demand for "green bonds"
While government bonds with a maturity of more than 15 to 20 years were the exception in earlier years, papers with such a long maturity are the norm today. "It is not uncommon for states to take on debts for 50, 70 or even 100 years," says Duernberger . “Due to the record-low interest rate environment and regulatory requirements, however, there is sufficient demand for them.” With the central banks, “additional buyers” appear “who have a well-stocked coffers and usually keep the securities they have bought in their books until they mature ". As a result, the liquidity, which is so important for the financial markets, is significantly reduced, according to Duernberger. "At the same time, however, investors' worries about creditworthiness are disappearing and the risk premiums converge in narrow ranges."
The Spängler expert sees the future development of government bonds as being strongly influenced by the issues of climate and environmental protection. In Europe in particular, the climate package (“Green Deal”) announced in 2019 will cause a rethink in the use of budget funds. As Duernberger notes, France, for example, as one of the pioneers, recently issued a green bond worth seven billion euros with a term until 2044 and thus met with almost five times as much demand from investors. As an aside, the EU Commission is also planning to partially refinance the reconstruction fund created to cope with the Corona crisis with “green” bonds.
Rising returns "can definitely be seen as a positive sign"
In the words of Felix Düregger - he is the head asset manager of the Bank Austria subsidiary Schoellerbank - government bonds have become “a very expensive asset class, especially in Europe” in recent years. “Of course the market is inhomogeneous,” continues the financial expert. On the one hand, German and French government bonds are the most expensive benchmarks, which means that you have to accept the lowest or even negative returns on your investment in exchange for a high level of security. “Investors have to buy terms of more than ten years in order to achieve positive returns.” On the other hand, Spanish government bonds, for example, offer positive returns from as little as seven years, but investors would have to accept a lower rating, according to Düregger.
“Recently, in Europe, but especially in the USA, there were increases in yields on long-term government bonds. Although these mean losses for bond investors, they reflect positive economic expectations and rising prices. ”So they are“ definitely to be seen as positive signs, ”explains the Schoellerbank expert. This is how the US Federal Reserve interprets it, saying that it allowed the yields on ten-year Treasuries to rise unhindered by over 100 basis points (corresponds to one percentage point, editor's note) in a few months. For Europe, Düregger assumes that the ECB will not allow such sharp increases in interest rates in line with the European debt union and will protect a persistently low level of interest rates. “Inflation expectations in Europe are also nowhere near as high as in the USA,” says Düregger. Nevertheless, he expects government bond yields to continue to rise in the coming months and quarters.
No signs of a sovereign debt crisis
Karl Freidl, Head of Asset Management, explains that the yields on ten-year US government bonds have already more than tripled from plus 0,5 to plus 1,7 percent, while the yields of their European counterparts are still down Fund management of Steiermärkische Sparkasse, back to the different speeds in the economic recovery in the USA and Europe. "In addition, the euro zone continues to struggle with its completely different realities, which it shares in the north and south."
However, Freidl does not see a possible sovereign debt crisis in the euro area: “There are currently no signs of this. Even if we are a rising inflation expect, then not to a double-digit extent that would shake all confidence in the euro and government bonds. "Freidl is even assuming an even stronger euro area in the future:" The two last major crises - 2008 and 2020 - have shown that especially in times of the greatest uncertainty many other currencies are depreciating against the euro, even those of countries with good credit ratings ”, he refers to the development of the exchange rate against the Norwegian and Swedish krona.
Regarding the performance of euro government bonds, Freidl explains that the ECB had "very clearly influenced" them when it began to buy government bonds on a large scale. “In order to achieve even more effects, the purchase programs would have to be expanded, but this is not very likely.” From Freidl's point of view, the next step would be Eurobonds, “which we already have through the back door - through the ECB emergency program Pepp - anyway ". So as long as the European Central Bank acts in some form as a bond buyer, "the yields will not increase significantly," Freidl is convinced.
“On the other hand, we have reached the end of the flagpole,” continues the financial market expert. "We do not expect that the minus 0,7 percent that we saw for ten-year German government bonds last year will be undercut again." Freidl therefore no longer expects price increases due to further falling yields. His conclusion: even if government bonds have the function of a stabilizer in the portfolio, they will no longer generate income for investors in the future.