LONDON: A pair of bond sales in the past week shows how European governments are increasingly turning to households to tackle the challenges of a high interest rate landscape.
If they gauge it right, countries like Belgium can offer an interest rate that’s appealing to its citizens while lowering sovereign borrowing costs, in what Societe Generale SA (SocGen) analysts call a “win-win”.
The nation has already attracted over €22bil (US$24bil) for the note.
The sales also encourage lenders to offer their customers higher interest on deposits.
That’s key in the United Kingdom, where a bond boasting a yield far above the prevailing market rate was sold last week, increasing competition and getting banks to more fully reflect recent central bank rate hikes.
“There’s a lot of pandemic savings, but a lot of it is still out there because it’s been held by these wealthier members of society,” said Richard McGuire, head of rates strategy at Rabobank.
“This is something governments in Italy, Portugal and now Belgium have cottoned onto.”
Belgium’s sale of one-year notes dwarfs the debt agency’s €250mil retail bond target for this year and should help keep a lid on the yield of some of the nation’s other debt, according to analysts at SocGen and Rabobank.
Europeans are relieved to see the end of zero and even negative rates, and the sales show there’s a lot of appetite among ordinary citizens for higher-paying products. Governments are looking to diversify their funding base as they face higher financing costs and growing spending plans.
Some nations have proved more willing to tap their citizens’ savings than others.
Italy has an established and innovative retail bond market. Its so-called BTP Futura range first sold in 2020, links returns to economic growth. In June, the nation sold BTP Valore debt, which comes with a bonus payment for holding until maturity. The government raised more than €18bil from that sale, a record amount for an Italian offering pitched at retail investors.
After household demand surged in Portugal, the government cut back its planned issuance of bonds and bills to institutional investors by almost €9bil.
In Hungary, savers increased holdings of domestic government bonds in the second quarter by almost 1.4 trillion forint (US$3.9bil), a 13.5% jump from a year earlier.
The rapid shift out of bank deposits is being closely monitored by the central bank, which told lenders last month to step up their liquidity management to avoid further scrutiny.
The jumbo sale in Belgium harks back to a blowout retail offering in 2011, when it raised €5.7bil. Belgium had put its retail programme on ice for three years before tiptoeing back into the market with smaller issues in 2022.
The latest sale means the government can afford to cut sales of its bills and bonds aimed at institutional investors.
“With European government bond yields of all maturities continuing to climb, domestic retail investors have been keen to buy the dip,” said SonGen strategist Sean Kou.
Kou’s team recommends buying the nation’s bills versus equivalent French securities on a bet that the “extraordinary demand” for its retail bonds will see Belgium reduce its short-maturity borrowing programme.
In many countries, banks have been slow to raise interest rates because they’re still flush with cash after years of monetary stimulus. But political pressure is rising.
Belgium said its sales were intended to encourage commercial lenders to up their offerings, while UK regulators and lawmakers have lambasted banks for their stingy savings rates.
Austria plans to offer retail government bonds via direct sales to households seeking alternatives to low-rate bank deposits, Finance Minister Magnus Brunner said.
The UK’s state-backed savings bank, known as NS&I, released a new one-year note at the end of the month that pays 6.2%, well above the market average. — Bloomberg
