The sovereign, supranational and agency market is expected to be flooded with several billion euros of additional buying interest in April, potentially introducing further severe distortions and making the primary market difficult to navigate.
A record level of European government bond redemptions and an expanded European Central Bank quantitative easing programme are expected to create a demand/supply imbalance in April of 100bn - at the very least.
This is likely to make a normally stable market much more unpredictable, and in the worst case could create a similar situation to this time last year, when bonds rallied to record levels and made new issues extremely challenging.
On that occasion, the primary market was severely disrupted, a situation highlighted by Europe's most liquid government-backed institutions, KfW and EIB, both falling short of a benchmark size on new deals for the first time in their bond issuance history.
"In April we see a huge volume of government redemptions, delivering a massive amount of net cash back into the markets," said Lee Cumbes, head of public sector at Barclays.
"Of course, there is potential for an extra squeeze lower in yield, all else being equal, and in that scenario investor behaviour becomes a bit more unpredictable," he said.
European government bonds are already trading at extremely low - in many cases negative - yields as a direct consequence of the ECB's quantitative easing measures.
When the QE programme was first announced in March 2015, a rally of unprecedented proportions followed, culminating in German development bank KfW briefly trading inside German Bunds.
Though that extraordinary situation corrected itself as they year wore on, KfW is beginning to creep up on its guarantor once again. The agency's five-year bond - a 1.625% January 2021 trade - is now just 13bp over Bunds from a more normal 20bp spread a month earlier.
Now that the asset purchase programme has been increased by 20bn to 80bn a month starting in April, there are concerns that the situation could worsen significantly.
The ECB also lifted the cap on its ownership of the outstanding stock of supra and agency bonds to 50% from 33%, suggesting it will continue to target this class of borrower.
The effect is expected to be most pronounced in the first three months of the expanded programme.
The ECB expanded the programme to include corporate bonds beginning in June, meaning that for three months the extra 20bn will have to be spent primarily on public sector names that are already on the ECB's shopping list.
In addition, April will see 145bn of redemptions and 27bn of coupon payments from European governments. There will also be 18bn of redemptions and 4bn of coupon payments from the seven largest European supranational and agency names, according to figures from ING.
After taking supply into account, it amounts to a payback of about 100bn, easily the largest net payback of the year, said Padhraic Garvey, global head of debt and rates strategy at ING.
"All things considered that's quite a chunky combination of coupons and redemptions and would be extremely supportive for bond markets," he said.
Last year's ECB-fuelled rally in SSA bonds led many investors - particularly real-money buyers - to flee the sector and precipitated a sharp, shocking selloff in Bunds.
There are concerns that a similar selloff could occur if the situation plays itself out in the same way as real-money accounts have only just returned to European government bond syndications in force.
This month, fund managers, insurers and pension funds between them took almost 43% of a Belgium 3.5bn 1.6% June 2047 bond. Subsequently, they bought 41% of a Finland 4bn 0.5% April 2026 bond and 67.5% of a Spain 5bn 2.9% October 2046 bond.
Given that insurers and pension funds in particular have specific targets for returns, increasingly negative yields could drive those accounts away again.
"Issuance has been very strong this year so far, but I still feel we are skating on thin ice," said one SSA syndicate official. "Liquidity has been a concern for some time now and it will only get worse."
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