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