Euro zone governments will have to charm private buyers to step in and buy 400 billion euros of additional debt next year, which will keep the bloc's battered bond markets under pressure as the European Central Bank further unwinds its support.
The ECB, effectively a guaranteed debt buyer since it launched quantitative easing in 2015, even hoovering up all the new bonds governments sold from at least 2019 to 2021, will start offloading its holdings.
"We do see little appetite among investors to be buyers of European bonds next year," said Julian Le Beron, chief investment officer for core fixed income at Allianz Global Investors. German yields have already shot up 250 basis points this year and Italian yields are up more than 300 bps, including 50 bps in the last week alone.
Investors will also have to grapple with Italy's debt sustainability. Yields are now above the 4% level that begins to worry investors. A "higher for longer" ECB adds to those concerns, BofA said. "The banks are the only kind of sector which can create their own liabilities when buying assets," Jeffery said.
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