Ελληνικά δημοσιονομικά

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European Bonds: Issue Now, Pay Later

As governments flood the market with debt to pay for bailouts, the high-yielders hold promise for value investors.

Governments have been flooding the bond market recently with new debt to help them pay for things like bank bailouts and fiscal stimulus packages. That shouldn't be a problem, should it? After all, investors are all about the safety of fixed income. Actually, it might just be a problem for some governments, and one that may be capitalized on by value-oriented investors.

In Europe, some of the region's smaller and less creditworthy governments are already finding it increasingly expensive to sell their debt. Take Greece. The spreads between a three-year Greek government bond and a three-year German government bond have widened dramatically in just the last month. At the end of October they were 60 basis points over their German counterparts; now they are 1.3 percentage points. About a year ago, Greek three-year bonds were only about 20-30 basis points over German ones.

There have even been signs that some of the more attractive bond sellers could struggle to raise money: in mid November an auction for 10-year bonds in Germany--one of the world's most popular issuers of government debt--failed after it did not attract enough investors.

A supply glut isn't really an issue at the moment because stocks are still in freefall and investors are seeking safe havens. But a raft of new government bonds are set to flood the market in January and February, and if the bear market for equities starts to pick up, bond prices will fall and their yields will rise, making it more expensive for governments to issue their debt. For some, that could lead to even wider deficits.

Greece is paying "an awful lot" more than other governments to issue debt, said Barclays Capital's Huw Worthington, who said it would have to launch more auctions just pay for the extra financing costs. "They're going to have to issue more debt to pay more for it."

While that's bad news for the Greek government, wider spreads could spell juicy yields for value investors who are willing to risk their money on governments that aren’t as creditworthy as their larger counterparts. Worthington advises such investors to sit tight: "When you see the supply increase in January and February, things might get worse. My feeling is that [a spread of] 180 is more likely to go to 200 than to go back down to 100." Which other governments are set to pay more for issuing debt? Worthington pointed to Ireland and Italy.

Jan Randolph, head of sovereign risk at IHS Global Insight, said Britain and France were also in a difficult position because they are launching hefty stimulus plans that should lead to higher debt levels. Though Germany's recent bond auction failed, that country is better placed than most, Randolph said, because it has a strong commitment to medium-to-long fiscal sustainability and only a modest stimulus package in the works.