European Bond Market Smaller After Bank Debt Repayment

Europe’s 20.3 trillion-euro ($26.1 trillion) bond market is shrinking as financial institutions repay debt, according to Citigroup Inc. analysts in London.

Banks and other financial institutions reduced issuance by 560 billion euros to 4.7 trillion euros in the five quarters to March 31 this year, strategists Hans Lorenzen and Alessandro Tentori wrote in a report today. In absolute terms, the market declined by 30 billion euros in the year through March, a signal it’s stagnant, according to Lorenzen, based on data compiled by the European Central Bank.

“It is the fall in financial issuance that is the principal, though not the only, reason for the decline in the total outstanding,” Lorenzen said in a telephone interview today.

European banks have been reining in lending and shrinking in size as they recover from the 2008 financial crisis. They also are looking to depositors rather than capital markets to fund their businesses, meaning they have less need to sell bonds to raise cash.

“It’s not sovereign debt that is in short supply,” according to Lorenzen, who said sovereign debt accounts for 8 trillion euros, or 39 percent of the total outstanding.

Over a longer time period, growth in the European bond market has lagged behind the U.S. Since 2010, the amount outstanding has increased by 8 percent in Europe, compared with growth of 18 percent in the U.S., Lorenzen and Tentori wrote. Going further back, the total outstanding in Europe rose by 75 percent in the decade to the end of the first quarter of this year, they wrote in the report.

via Bloomberg

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza