Europe’s bonds are so hot right now

Move aside US Treasuries, it’s European bonds getting all the attention right now. 

You see, it turns out Japan offloaded $13B worth of German bonds back in April, even after Friedrich Merz looked set to restore Berlin’s political stability and fiscal sustainability.

Who cares?

One’s care-factor might depend on what drove Japan’s decision to sell:

• Does famously long-term Japan no longer see Germany as a good bet?

• Did Japan just want to free up some cash for emerging priorities back home?

• Or… might it have something to do with all those sizzling rumours that US trade negotiators are nudging governments to purchase US bonds, meaning Tokyo might’ve simply swapped bunds for bonds.

It also depends a little on how you view what’s happening in Italy, Spain, and Greece.

Long the EU’s fiscal bad boys, markets are now suggesting there’s not too much risk-difference between lending to these three versus their thrifty neighbours like Germany.

• Italian bond yields are now <1% higher than in Germany (versus a full 5.7% higher a decade ago)

• Spain has now pushed its borrowing costs below high-fallutin’ France, and

• Even Greece, once flailing under the frugal gaze of Angela Merkel, is now only facing borrowing costs a tad pricier than those confronting Paris. 

What’s going on?

As always with bonds, there are a few drivers in parallel, including…

• The European Central Bank’s rate cuts, which tend to have bigger impacts at the bloc’s periphery (more liquidity and confidence, lower risk perception)

• Those periphery capitals have also done a bang-up job of lowering their debt-to-GDP ratios lately, giving investors and lenders more confidence

• Giorgia Meloni seems to have cracked the code for political stability in Italy, and

• The EU’s big spending plans around recovery and security have encouraged fiscal discipline while enabling joint EU borrowing (something Berlin resisted for years).

Arguably, the common theme across each driver above is that investors and lenders are now detecting a moment of cohesion in Europe.

Sure, Brussels will still be Brussels, and leaders will still roll into town wielding their veto like a stick to periodically jam through the EU’s spokes. But in the big picture, there’s now consensus around how much to spend, how to spend it, and how to finance it (jointly).

So all that to say… maybe Japan’s decision to sell German bonds wasn’t about Germany.