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FOCUS | EUROZONE 2019 Government Bond Supply Summary

Core Content

This report provides a preliminary forecast for the 2019 eurozone government bond supply, analyzing the impact of quantitative easing (QE) and the overall market implications for bond yields.

Key Messages

• Gross Supply: Expected to remain around EUR860bn, unchanged from 2018.
• Redemptions: Estimated at EUR670bn, an increase of EUR40bn compared to 2018.
• Net Supply: Projected at EUR190bn, a decrease of EUR40bn from 2018.
• ECB QE Purchases: Expected to collapse to nil in 2019, a significant EUR180bn fall compared to 2018.
• ECB EGB Reinvestments: Projected at EUR130bn for Germany, France, Italy, and Spain, a doubling compared to 2018.
• Gross Supply less QE (including reinvestment): Estimated at EUR730bn, a EUR120bn rise versus 2018.
• Net Supply less QE (excluding reinvestment): Estimated at EUR190bn, a EUR150bn rise versus 2018.

Market Views

• The ECB has stated that the stock of central bank balance sheets is more important for yield levels than the flow of QE.
• Despite this, the increase in gross supply less QE and net supply less QE is expected to act as a headwind for bond markets in 2019.
• The DV01 proxy (a measure of interest rate sensitivity) is set to rise further, which could lead to a rise in yields, even if the ECB conducts a large-scale Twist in reinvestments (not the base case) or the WAM of EGB supply declines further (not expected to be material).

2019 Supply Forecasts

Country-Specific Notes

• Germany: Expected to have a slightly lower gross supply of EUR140bn, with a -3.4% change compared to 2018.
• France: Gross supply is expected to remain EUR220bn, with a -1.8% change. Includes buybacks.
• Italy: Expected to see the largest increase in gross supply, at EUR255bn, up from EUR239bn in 2018.
• Spain: Gross supply is expected to be EUR130bn, slightly lower than 2018’s EUR132bn.
• Belgium: Expected to have a -11.8% change in gross supply, with a EUR30bn estimate for 2019.
• Netherlands: Gross supply is expected to be EUR23bn, a -4.2% change from 2018.
• Austria: Gross supply is expected to be EUR18bn, with a +17.6% change from 2018.
• Finland: Gross supply is expected to be EUR10bn, with a 0.0% change.
• Ireland: Gross supply is expected to be EUR18bn, with a 0.0% change.
• Portugal: Gross supply is expected to be EUR15bn, a -11.8% change from 2018.

ECB QE and Reinvestment

• The ECB is expected to end QE in 2019, with no new purchases.
• However, PSPP reinvestments are anticipated to increase sharply, particularly in Italy and Spain, with a doubling compared to 2018.
• The ECB may adopt a Twist strategy, reinvesting more in the long end than the short end, but not in Germany.

Capital Key Impact

• The new capital key, effective from 1 January 2019, is expected to have limited market impact.
• If applied to the whole stock of PSPP, it would exacerbate deviations, particularly in Italy and Spain, but this is not expected.
• The deviations from the new capital key could affect the ECB's ability to correct them, which may influence market significance.

DV01 Proxy and WAM

• The DV01 proxy (YTM * AMT) is expected to rise further in 2019.
• The WAM of EGB supply has peaked in 2016 and is expected to remain unchanged from 2018.
• Core (Germany, Austria, Netherlands, Finland) has seen a decline in DV01 since 2017, while peripheral (Italy, Spain, Portugal) has seen higher DV01.
• The DV01 impact of QE is expected to diminish further in 2019, with a more subtle retreat expected.

Conclusion

The 2019 government bond supply is expected to be a headwind for bond yields, due to the increase in gross and net supply and the decline in ECB QE. While the ECB’s reinvestment policy may provide some support, the overall supply dynamics are expected to pressure bond markets and drive up yields.