Europe’s Auction Rush Before Bond Rout Saved Taxpayers Millions

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Euro-area nations saved their taxpayers many millions of euros by locking in record-low borrowing costs before a rout in the region’s debt markets took hold.

Seven of the currency bloc’s 10 biggest issuers already covered more than half of their 2015 gross debt-sales targets by June 5, according to Royal Bank of Scotland Group Plc calculations. Portugal led the way by selling 75 percent of its full-year requirement.

“Definitely governments were aiming to profit from the record-low yields,” said Marco Brancolini, a London-based bond analyst at RBS. “Many market participants thought such low rates wouldn’t last.”

The acceleration by national treasuries did more than just pare funding costs ultimately borne by taxpayers. European Central Bank President Mario Draghi said last week that heavy issuance by euro-area governments had actually contributed to the region’s bond rout, as they frontloaded fundraising through auctions and sales via banks.

In May alone, net euro-area issuance was 72 billion euros ($79 billion), the highest for a month this year, according to BNP Paribas SA.

Spain has sold 9.8 billion euros of 10-year debt in 2015 auctions at a weighted average yield of 1.37 percent. After the selloff in euro-area bonds, the securities now yield about 2.10 percent. By way of example, a 1 percentage point reduction on the coupon of a 1 billion-euro bond will save 100 million euros in interest payments over 10 years.

Ireland Ahead

Spain’s picture is repeated across the currency bloc, where countries that were borrowing at record-low yields as recently as April now face rates of interest that are as much as six times higher.

Ireland had covered 60 percent of its planned issuance by the end of last week, according to RBS, with Italy at 55 percent and Spain 53 percent. Germany had completed 47 percent, while Austria’s total of 29 percent was the least of the 10 nations. RBS didn’t estimate total savings.

While the first half of the year “is always a busier time for issuance, these patterns have been more intense this time,” said Jan von Gerich, chief strategist at Nordea Bank AB in Helsinki. Countries including Spain, Germany and Ireland are due to sell more bonds in the coming week.

Coming Unglued

European debt plunged last week, with German 10-year yields rising the most since 1998, as the region helped drive a global fixed-income rout. Selling that began June 2, when a report showed inflation was returning to the currency bloc, accelerated the next day when Draghi said investors should get used to volatility in markets.

The declines left a Bloomberg index of euro-area bonds, which had returned 4.6 percent in 2015 as recently as April, with a 1.1 percent loss this year through June 5. That’s pushed the average yield on the 346 securities in the index to 1.04 percent from as low as 0.475 percent in March.

The yield on German 10-year bunds rose five basis points, or 0.05 percentage point, to 0.89 percent as of 4:40 p.m. London time on Monday. In April the nation sold bonds of that maturity at a yield of just 0.13 percent.

The frontloading is less good news for the investors who have accepted the meager rates to hold the securities. While that won’t matter to the ECB, which began buying sovereign bonds in March to stoke inflation, it may have more of an effect on pension funds, which need to buy government bonds to match their mandates.

Put in Perspective

Although yields have climbed, they are still a fraction of the levels reached during the sovereign-debt crisis earlier this decade, when higher borrowing costs locked nations out of markets all together. Portugal and Ireland needed to seek international aid to cover their financing needs, and, while it could still issue debts, Spain had to pay as much as 6.98 percent to borrow for 10 years.

“This time the risk is more of somewhat higher refinancing costs, whereas some years ago you were talking about the risk of losing market access altogether,” said Nordea’s von Gerich. “In other words, the consequences of market volatility were much larger some years ago, though naturally market volatility always makes life harder for the issuers as well.”

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