ECB bond buy­ing and po­lit­i­cal jit­ters erode for­eign hold­ings of eu­ro­zone debt

Financial Times Middle East - - Markets & Investing - MEHREEN KHAN AND THOMAS HALE

For­eign in­vestors were net sell­ers of eu­ro­zone bonds in 2016 for the first time since the in­tro­duc­tion of the sin­gle cur­rency, as the Euro­pean Cen­tral Bank con­tin­ued to pur­chase the con­ti­nent’s debt and kept yields low.

Over­seas bond­hold­ers re­duced their net hold­ings of eu­ro­zone debt se­cu­ri­ties by €192bn dur­ing 2016, re­vers­ing an in­crease of €30bn the year be­fore, ac­cord­ing to data from the ECB.

Sov­er­eign bonds made up the bulk of the sales at €116bn. Bench­mark bor­row­ing costs reg­is­tered lows dur­ing the sum­mer.

The ECB said the sell­ing re­flected its stim­u­lus pro­gramme, un­der which more than €1.4tn of govern­ment bonds have been pur­chased since March 2015.

“If the ECB is buy­ing €80bn of bonds a month, then some­one has to sell to them,” said Sea­mus Mac Go­rain, a port­fo­lio man­ager at JP Mor­gan As­set Man­age­ment.

At the end of March the cen­tral bank will re­duce its as­set pur­chases to €60bn a month. With the re­duc­tion of pur­chases on the hori­zon, for­eign in­vest­ment in Euro­pean as­sets has come un­der the spot­light. Jit­ters in the mar­ket for French govern­ment debt have raised ques­tions over the im­pact of po­lit­i­cal risk on in­vestor sen­ti­ment.

At the end of Jan­uary in­vestors from Ja­pan had sold French sov­er­eign bonds for three con­sec­u­tive months, the first time this had oc­curred since the height of the euro zone cri­sis.

The ECB’s pur­chases were the main ex­pla­na­tion for higher sell­ing from over­seas in­vestors. But the fo­cus is in­ten­si­fy­ing on the po­lit­i­cal back­drop. Anti-euro par­ties have es­tab­lished a foot­ing in the Nether­lands, France, Ger­many and Italy.

“In­vestors can­not ig­nore the po­ten­tially large ex­change rate changes posed by a coun­try leav­ing the euro,” said An­drew Bo­som­worth, head of port­fo­lio man­age­ment at Pim co.

“Even if that prob­a­bil­ity is very low, [it cre­ates] a dis­in­cen­tive to com­mit to long-term, cross-bor­der in­vest­ments, ham­per­ing the for­ma­tion of a cap­i­tal mar­kets union.”

The ECB noted what it called “height­ened risk aver­sion” among in­vestors to­wards euro-de­nom­i­nated debt af­ter the UK vote to leave the EU last June. It also cited “per­sis­tently neg­a­tive in­ter­est rate dif­fer­en­tials vis-à-vis other ad­vanced economies” as a fac­tor in net port­fo­lio debt out­flows in 2016.

Cen­tral bank data also showed that in­vestors out­side the euro area re­mained net pur­chasers of eu­ro­zone equities last year.

The Euro Stoxx 50 in­dex — a broad gauge of the con­ti­nent’s biggest stocks — is up 13 per cent in the past year.

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