2024 budget deficits to keep euro area bond issuance close to record high

In Short

The fundamentals of the government bond market have changed significantly in recent years. With the ECB having shifted from Quantitative Easing (QE) to Quantitative Tightening (QT), and debt ratios as well as budget deficits still elevated by the pandemic-related and energy-price-induced expenditures, the scarcity of government bonds has come to an end.

Highlights:

  • In 2024, European economies are set to start consolidation as the suspension of the Stability and Growth Pact comes to an end. Given the European Commission’s forecast of an average euro area deficit of -2.8% of GDP in 2024, the supply of government bonds will remain ample.
  • We expect the ECB to start PEPP non-reinvestments at a moderate pace in 2024, still absorbing € 120bn out of an estimated € 180bn. A more aggressive QT could lead to a more substantial lack of demand.
  • Gross issuance of government bonds will remain at a sky-high level of around € 1275bn in 2024, as a moderately declining net issuance is balanced by higher redemptions. Moreover, the net-net issuance will even increase again (€ 680bn vs. € 640bn) as a higher volume of Quantitative Tightening is expected.
  • Additionally, the EU will moderately increase its net issuance volume in 2024. As a result, the technical situation will remain tight next year, preventing yields from falling significantly.
     

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2024 budget deficits to keep euro area bond issuance close to record high

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