Eurozone borrowing costs drop to pre-crisis levels

Government borrowing costs in the eurozone have fallen back to levels last seen before the start of the coronavirus crisis, underlining the success of the European Central Bank and other economic policymakers in restoring confidence among debt investors.

Bond yields in Italy and other southern European nations spiked in March when it became clear that the Covid-19 pandemic and the resulting shutdowns would lead to a collapse in economic activity, just as governments were borrowing heavily to support businesses and households. Yields rise when prices fall.

But the ECB’s massive programme of asset purchases — announced in mid-March at €750bn and expanded last month to €1.35tn — has since improved sentiment, pulling borrowing costs back down and making investors more confident about holding the debt of weaker sovereigns.

Italy’s 10-year yield was close to a four-month low at 1.22 per cent on Tuesday, roughly where it was prior to March’s sharp sell-off. Yields in Greece, Spain and Portugal have also reversed their coronavirus-driven increase, despite a surge in bond issuance across the euro area that has caused many countries’ credit profiles to deteriorate.

Cyprus was the latest country to take advantage of investors’ hunger for higher-yielding eurozone debt on Tuesday, drawing €5bn of orders for a sale of four-year and 20-year bonds.

Investors have also been encouraged by signs of progress on sharing the financial burden of the crisis response across the currency bloc. Eurozone leaders are to meet this week to discuss details of a €750bn recovery fund for the worst-hit economies, ahead of a summit on July 17-18. 

“At the height of this crisis it was every man for himself in the eurozone — it really felt like markets were being thrown to the wolves,” said Mark Dowding, chief investment officer at BlueBay Asset Management. “Now we have some evidence of solidarity, both in terms of ECB action and also the EU recovery fund, it’s understandable that we have completed this round trip in yields.”

The spreads between German yields and those in Italy and Spain — a key gauge of sovereign risk in the eurozone — are also back at relatively narrow levels seen in early March. Some analysts predict these spreads could begin to widen again if the ECB continues to taper the pace of its asset purchases. Purchases last week came to €25.9bn, down 34 per cent from the previous week, according to data published by the central bank on Monday.

Meanwhile, there are signs of tensions between policymakers. Dutch central bank governor Klaas Knot, for example, has stressed that €1.35tn should be an upper limit for the purchase programme, and that the full amount does not necessarily have to be spent. The total so far comes to €355bn.

Some investors may move to trim their exposures to riskier eurozone debt ahead of next Thursday’s ECB policy meeting, said ING strategist Antoine Bouvet.