Euro Government Bonds: Lower 2018 net core bond supply expected, but slightly higher elsewhere – Our initial estimate of the 2018 borrowing requirement of the nine largest eurozone sovereign issuers is at EUR 1213bn, which is slightly lower than in 2017. A main driver of the lower funding need is robust economic growth. Of the total funding need, we estimate that EUR 772bn will be funded via bond issuance. Net bond supply, after taking into account redemptions, will rise moderately from EUR 183bn to EUR 193bn. While these figures might suggest a relatively stable picture, differences on a country level are clearly observable. Most notably, net core bond supply is expected to fall further, while that of other countries will rise. Within the core, the expected 2018 Dutch bond issuance stands out as net bond supply will most likely reach record low negative levels. Furthermore, France, Spain and Italy will remain the largest net bond issuers of the eurozone. Overall, we expect that funding conditions will remain relatively favourable. This means that ultra-long dated issuance will continue in 2018, but only of countries which have already ventured into this area before. Finally, these bond supply forecasts do not incorporate the impact of the potential ECB QE purchases (and reinvestments) in 2018. However, as these purchases are significant, net bond supply of each country will effectively be in deeply negative territory. This means that the available pool of government bonds for private investors will shrink, which is one factor that will help the ECB to taper while avoiding a tantrum. (Kim Liu)170921-Global-Daily.pdf (46 KB)
Euro Money Markets: ECB to introduce a new unsecured overnight interest rate – The ECB issued a press release announcing its plan to publish a new unsecured overnight interest rate based on data already available to the Eurosystem earlier today. This new overnight benchmark interest rate would be produced before 2020. It would be entirely based on actual euro transactions reported by banks and would then serve as a backstop reference rate. This initiative follows our earlier report in which we have mentioned that in contrast to the ECB’s stance towards Euribor, the ECB was open to offer an alternative to Eonia as an alternative benchmark rate, which could substitute or exist alongside Eonia. Now the ECB decided to take action as “…benchmark rates haven an important anchoring role for contracts in financial markets”, which…”play a pivotal role in the operationalization and monitoring of the transmission of the ECB’s monetary policy.” Contrary to initial reports, we now know that the new initiative will function as a backstop and will be fully transaction based and will not completely replace Eonia altogether. However, the exact form of this backstop benchmark rate is still unclear.
Interestingly, the question arises whether this new benchmark could effectively serve as a backstop. As in times of illiquidity or high risk scenarios a fully transactions-based benchmark could introduce more uncertainty and volatility to the benchmark rate. This is supported by the fact that EMMI – in its search for an alternative calculation methodology for Euribor – deemed it not feasible to have a ‘seamless’ change from the current quote-based methodology to a transaction-based framework. This should mean that the ECB is comfortable enough that transaction data would be sufficiently available in times of market stress. Finally, the ‘high-level’ features of this new overnight interest rate will be communicated to the market in the course of 2018 and market feedback will be collected. This should coincide with the results of the verification process of a new Euribor calculation methodology by EMMI also due next year. (Fouad Mehadi)
China Macro: S&P downgraded China to A+, changing outlook to Stable – Earlier today, Standard & Poor’s downgraded China’s long-term foreign currency sovereign rating from AA- to A+, changing its outlook from Negative to Stable. S&P is now at par with Moody’s and Fitch, with all three leading rating agencies now having a stable outlook again. The rating agency pointed to the prolonged period of strong credit growth having increased economic and financial risks. The move does not come as a complete surprise, as S&P changed its outlook to Negative in March 2016, while Moody’s made a similar downgrade last May. Moreover, we have been pointing to the ongoing rise of China Inc’s overall debt levels (to almost 260% of GDP per March 2017), as credit growth continues to outpace nominal GDP growth. The ongoing build-up of debt obviously comes with the longer-term risk of a potential sharp decline in future growth rates in case of an unorderly deleveraging. At the same time, we do not expect a systemic crisis nor a hard landing in our two-year forecast horizon, partly because China’s foreign debt is low by EM standards, its saving rate is high and external buffers are still strong. For more background on China’s debt burden see our report here and for our latest take on the Chinese economy here (Arjen van Dijkhuizen).