Markets

Marcus Ashworth is a Bloomberg Gadfly columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

Investors are moving out of the safe shallow end of the yield curve to snap up ultra-long dated bonds in Europe.

Emmanuel Macron's victory in the French presidential election has triggered a flood of issues by governments and companies with maturities of longer than 10 years. That stands in sharp contrast with the earlier part of the year, when investor worries about political risk in Europe sapped demand.

Ultra Long Demand
Order books in May have been very healthy for 20-year+ maturities since Macron's victory
Source: Bloomberg, ESM, Debt Agencies
The U.K Gilt 1.75% 2057 tap is in sterling

Belgium received more than 15 billion euros ($17 billion) of orders for its 3 billion-euro 20-year bond this week. That's impressive considering the securities offer just 1.5 percent in yield. Similarly, France got 31 billion euros of orders last week for a 30-year bond that yields 2 percent. Next up is likely to be Italy, which is expected to issue a large 30-year deal in coming weeks.

Demand isn't just limited to euros: the U.K. government took more than 26 billion pounds of orders, the most ever in a gilt auction, as it sold 5 billion pounds more of an existing 40-year issue.

Even deals that didn't trade well in the after-market initially are recovering: yields on the European Financial Stability Facility's recent 16-year bond have tightened back to below the original offer spread.

At 6 billion euros, the issue size was larger than the market had been expecting, causing some initial indigestion. But it helps to have the European Central Bank on your side: the new bond will be eligible to purchased by the ECB from Thursday. 

This confidence has trickled down the credit-rating scale to high-yield debt. Look at how the additional premium investors demand to own the securities over investment grade equivalents has collapsed.

Gimme Yield
Hunt for yield has driven high yield spreads to outperform investment grade
Source: Bloomberg

It helps that benchmark German government bond yields have been trapped in a 35 basis point range this year. Usually, any rise in government yields has an adverse effect on lesser-quality credits and riskier longer-dated bonds.

Play The Range
Investors feel secure reaching for yield in ultra-longs as long as the range holds
Source: Bloomberg

This enthusiasm for long-dated paper only makes sense in the context of record low interest rates and a bond-buying program that's seen the ECB's balance sheet become bigger than either those of the U.S. Federal Reserve or the Bank of Japan. The assumption is that Europe will start to resemble Japan, where the yield curve has been very low in yield for many years.

If however, the European economy really has found its footing and growth is sustainable then at some point interest rates will then need to normalize higher. That will be the moment the tide goes out for long bonds, but, for now at least, there's nothing on the horizon. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Marcus Ashworth in London at mashworth4@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net