By Harry Robertson
LONDON, Aug 21 (Reuters) – Germany and the broader euro zone are selling record amounts of bonds, adding to the pressures driving European bond yields to multi-year highs as the continent continues to borrow heavily amid crises ranging from COVID-19 to the Iran war.
Germany’s 30-year government bond yield hit its highest since 2011 at 3.79% on Wednesday, with inflation fears tied to the Iran war adding to the selloff. The euro zone’s benchmark issuer sold a bond at that maturity a day earlier with the highest yield in 15 years.
French yields are near their highest levels in 18 years, not far off 5%. Yields move inversely to prices.
Higher yields mean governments pay more to borrow, and they raise mortgage and corporate borrowing costs, potentially slowing economies.
It’s a challenging backdrop as governments and companies look to sell bonds again after the usual summer lull. In the longer term, there are also few signs that bond sales will slow.
Commerzbank estimates that German government bond supply will hit a record high in 2027 of €400 billion ($468 billion) in gross terms, up from €349 billion this year.
“We’re talking about a general situation where there’s a lot of money that needs to be raised in bond markets, and yields are adjusting to reflect that,” said Ales Koutny, head of international rates at $12 trillion asset manager Vanguard.
Germany on Wednesday saw soft demand for a 10-year bond sale, selling €3.8 billion versus guidance of €6 billion.
“We have post-summer supply coming back,” said ING senior rates strategist Benjamin Schroeder, who added that Germany announced its 30-year bond syndication earlier than many in the market had anticipated. “So this adds a bit to the upward pressure on yields.”
In a tectonic shift, Berlin is casting off years of stringent borrowing rules and ramping up spending on defence and infrastructure to revive the flagging economy.
The German finance ministry told Reuters that the high levels of borrowing and rising yields reflect a “massive investment in security and defence” required after Russia’s invasion of Ukraine.
EURO ZONE KEEPS SPENDING
Across the euro zone, governments continue to borrow heavily to support their economies after the COVID-19 and Ukraine crises, fund rising welfare and health bills as populations age, boost defence spending and grapple with increasingly volatile weather.
Barclays estimated in July that gross euro zone bond supply will hit a new record of €1.54 trillion next year, though it flagged significant spending uncertainties.