Savers Flock to Euro Zone Government Debt in Search of Returns

The Florence skyline, viewed from Piazzale Michelangelo, is nearly empty due to the ongoing coronavirus outbreak in Italy. Savers in the eurozone are rushing to invest in government debt in order to secure returns on their cash, as banks struggle to keep up with rising interest rates. Italy has set a new record by selling 18.2 billion euros worth of retail bonds this month, aiming to increase domestic holdings of its debt. However, this is just the beginning. Portugal has redirected half of its funding this year to retail investors, Belgium is expecting a ninefold increase in retail bond sales, and Spanish savers are flocking to Treasury bills. The level of demand has surprised debt managers and signifies the resurgence of savers in dedicated debt programs that they previously showed little interest in for the past decade. This return of savers reflects the recent structural shift since the European Central Bank raised borrowing costs steadily over the last year, in response to high inflation. For bond issuers, this influx of new buyers is a positive sign, as the ECB reduces their bond holdings. While some believed these movements would lose steam due to limited savings, Portugal’s debt agency board member, Rui Amaral, expressed that Portugal is experiencing rapid growth, but savings are not growing fast enough to explain the surge in retail investments. Portugal, which initially planned to sell 3.5 billion euros in retail bonds for the entire year, has already sold around 10 billion euros in new savings certificates to retail investors. This is a significant increase from the 4.6 billion euros sold in 2022 and the mere 500 million euros sold in 2021. To prioritize savings certificates, Portugal has reduced this year’s bond and treasury bill sales by 8.9 billion euros, with expectations to sell 12 billion euros worth of savings certificates by the end of the year, accounting for half of its 24.8 billion euro funding program for 2023. Amaral explains that banks in Europe are slow to increase deposit remuneration, leading to an influx of bank deposits being transferred to savings certificates. As a result, around 15 percent of Portugal’s outstanding government debt is now held by retail investors, an increase from the previous years’ 10 percent. Belgium has also seen a surge in retail bond sales, with the issuance of 390 million euros of state notes to retail investors this year, the highest since 2011. Debt agency director Maric Post predicts that the issuance could reach 1 billion euros by the end of the year, four times the initially projected 250 million euros for 2023 and up from 109 million euros in 2022. This increase would bring demand for retail bonds in Belgium back to levels seen in the early 2000s. In Spain, individuals now hold 15 percent of all outstanding Treasury bills, up from almost zero since 2015, making it the highest level recorded since 2002, according to Treasury data. However, individuals still only hold 1 percent of Spain’s overall 1.3 trillion euro public debt, highlighting the untapped potential. Scope Ratings suggests that Spain should tap into these retail investors to diversify its refinancing risk and contain borrowing costs. Spanish banks currently offer the lowest interest rate on deposits among major eurozone economies, with one-year deposits returning 1.3 percent compared to the 3.7 percent on 12-month bills. This difference in returns prompts savers to consider moving their money from deposits to government bonds. Societe Generale rates strategist Jorge Garayo emphasizes that individuals are realizing their money parked in deposits is not generating substantial returns compared to government bonds. Dedicated retail debt programs, such as the ones offered by Portugal and Belgium, provide non-professional investors with the advantage of avoiding losses from market fluctuations, tax benefits, and simplified purchasing processes. In France, where millions of savers deposit money in special accounts with regulated interest rates, demand for government bonds comes from banks themselves. Cyril Rousseau, head of France’s debt agency, explains that the institutions holding the deposits buy French inflation-linked bonds to generate the 3 percent rate they pay savers, which is partly indexed to inflation. In a recent bond sale, domestic investors bought 63 percent of a 3 billion euro bond linked to French inflation, while banks’ asset and liability management divisions took 37 percent. Rousseau suggests that a significant portion of the bond sale was driven by the need to invest regulated retail deposits. The ownership of government debt by households in the eurozone varies widely, with Germany having virtually zero household ownership and Portugal having a high share. While savers are not expected to replace trillion-dollar funds that dominate government debt purchases, their participation can provide a powerful buffer during a crisis. Italy introduced retail bonds in 2012 during the eurozone debt crisis to reduce reliance on international investors as borrowing costs increased. In December 2011, savers also purchased a record 5.7 billion euros of Belgian debt. Maric Post notes that the strong recovery of spreads after that issuance encouraged the continuation of the product, even when interest from the public was low. Eurozone governments must attract private buyers to manage their large debt burdens effectively.



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