European bond investors remain vulnerable to interest rate shock

The average maturity of new bonds sold in the euro zone hit its highest level in ten years, as cheap borrowing conditions favored by the European Central Bank left investors’ portfolios vulnerable to an interest rate shock.

Euro-denominated bond sellers have been able to extend the maturity of their debt given the intense pressure on investors, including asset managers, insurers and pension funds, to find acceptable yields on the securities. fixed income where many short-term issues are trading with a negative effect. yield.

But the price of long-term debt is more sensitive to changes in yield than securities with shorter maturities. In a rising yield environment, portfolios favoring longer-dated bonds suffer more than those with shorter duration or interest rate risk.

So far this year, 1.2 billion euros of syndicated bonds have been sold in the region with an average number of years to maturity of 10.7, according to Dealogic data. This figure is the highest since 2007, when it averaged 12.3 years, and has increased every year for the past six years.

The current 10-year German Bund is yielding around 0.35%, at the lower end of a range that has prevailed since September as inflation remains below the ECB’s target. Still, investors fear that with eurozone growth picking up there is room for longer-term yields to rise, especially from January the ECB will cut its monthly bond purchases by $60 billion. euros to 30 billion euros.

The ECB is holding more than 2.2 billion euros in bonds via quantitative easing, which, in addition to driving yields down, has taken swaths of high-quality debt off the market. About 760 billion euros of triple A-rated bonds are on the ECB’s balance sheet, according to estimates based on Citi indices.

“That’s what QE is basically supposed to do – push investors to take on more risk, and part of that risk is taking on ever more interest rate risk, ever more duration,” David said. Riley, head of credit strategy at BlueBay Asset. Management, who pointed to a “scarcity of safe assets with positive returns”.

“It raises some market risks – if we were to get significant inflation or a steepening of the yield curve. . . you would see a potentially quite volatile and violent market reaction to that,” he added.

Maturities at issuance have risen sharply in the market for euro-denominated bonds from sovereign, supranational and agency issuers: €432 billion have been sold through syndication this year, the highest annual total in the last decade.

The average maturity of this debt in 2017 was 13 years, compared to only 9 years in 2007. The average maturity of corporate bonds, excluding those sold by banks, is 7.9 years, down slightly from the peak 8.4 years in 2015.

In May this year, France attracted more than €30 billion in orders for a €7 billion bond maturing in 2048. In September, Austria sold €3.5 billion of 100-year debt, attracting bids of more than 11 billion euros in what marked the greatest century. bond in the public markets to date.

The European data is tied to a global shift by issuers to sell debt at longer maturities on the back of a pervasive search for yield. This year, syndicated sales of emerging market bonds with maturities of 10 years or more hit a record high, topping $500 billion for the first time.

Carol M. Barragan