Europe’s bond investors win no matter who takes the White House

By James Hirai

Europe’s yield-starved bond investors have the shifting political landscape in America to thank for a making Treasuries a decent investment again.

The prospect of a Democratic clean sweep on Nov. 3 has steepened the U.S. yield curve to such an extent that holding 30-year Treasuries hedged for swings in the euro is at the most attractive level in five years, relative to equivalent German securities.

At just under 1 percentage point, the yield differential offers quite the premium for European pension funds and asset managers. The alternative safe asset for most of these money managers -- Germany’s negative-yielding bonds -- is guaranteed to bruise them with a loss if they hold to maturity.

The assumption is that large fiscal stimulus under a Democratic presidency will lead to more borrowing, pushing long-end yields in the U.S. higher. But even if Donald Trump secures another term in office and quashes those expectations, the debt will rally, so the case for buying Treasuries for investors in Europe is a good as ever right now.

U.K Rates
Over in the U.K, where a resurgence of the coronavirus threatens to decimate jobs, Citigroup Inc. is among banks calling for the Bank of England to boost its bond-buying program. It meets to set policy Thursday.

Money-market traders are pricing in a 10-basis-point interest-rate cut to 0% by August, and investors will be looking out for clues on whether the central bank is willing to drive borrowing costs below zero if it has to.

Meanwhile, Germany is looking to build on the success of September’s debut green bond. It’s part of Berlin’s drive to replicate its conventional yield curve, while setting the stage for a 30-year green bond sale next year. Wednesday’s sale will have a 0% coupon and is expected to raise five billion euros ($5.83 billion), according to a finance agency statement.

To cap the end of a week laden with event risk, Moody’s Investors Service is set to review Italy’s rating on Friday. However, according to Societe Generale SA, the fact that S&P Global Ratings raised the nation’s outlook to stable earlier this month means a cut is unlikely. A one-notch downgrade to junk would push the nation’s bonds out of key indexes, forcing investors who track them to jettison their holdings.

Bond Sales
Germany, France, Spain, Finland and Austria will sell almost 23 billion euros of bonds next week, according to Commerzbank AG. There are no redemptions through Nov. 25, when France is due to pay 20 billion euros. The next coupon payments are not scheduled until the middle of the month from Italy.

The U.K. will hold three regular gilt auctions, selling a total of 7.75 billion pounds, and the Bank of England will buy back 4.4 billion pounds of debt in three operations.

• Data for the coming week is thin and mostly relegated to backward-looking figures and final PMI numbers
• Italy and Spain release preliminary manufacturing PMI figures on Monday and preliminary services PMI numbers on Wednesday
• ECB policy maker hawks are busy next week with Jens Weidmann, Robert Holzmann and Madis Muller all making speeches. Olli Rehn also speaks on the ECB’s strategy review
• BOE Governor Andrew Bailey speaks at the press conference following the policy decision on Thursday
• Moody’s Investors Service reviews Italy, Greece; Fitch Ratings reviews Germany and DBRS Ltd. reviews Finland on Friday