The ascent of quasigovernment bonds

In breve

The market value of euro-denominated quasi-government bonds has multiplied in recent years. Amid the rescue measures of governments in response to Covid-19, the importance of this asset class is set to increase further.
Core Matters

Highlights:

  • The market value of euro-denominated quasi-government bonds has multiplied in recent years. Amid the rescue measures of governments in response to Covid-19, the importance of this asset class is set to increase further.
  • The trend towards a lengthening of new issue duration and the high quality of the issuers make quasi-government bonds attractive for long-term investors eager to earn yield and preserve risk capital.
  • Despite a diverse composition – agency, non-euro area government, local government, supranational and government guaranteed securities – spreads are driven by similar factors like sovereign indebtedness and policy uncertainty.
  • Quasi-government bond spreads have already receded from the highs marked in spring. Despite concerns about surging supply, ongoing ECB purchases are expected to ensure market stability in the foreseeable future.
  • Additionally, the higher spread level is forecast to contribute to an overperformance of quasi-government bonds versus both covered and core government bonds in the long run.

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THE ASCENT OF QUASIGOVERNMENT BONDS

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