Investors rush to buy European Sovereign bonds after ECB relaxes its Quantitative Easing limits

Since the day the ECB announced that it would be purchasing bonds in the Eurozone to pump in extra liquidity in the economic block, the demand for sovereign bonds of almost all countries in the union has been swelling. Germany, Italy, Greece and a host of other countries are seeing a rush for their bonds while each of them has been taking measures to infuse more liquidity into their national economies which are currently fighting a pitched battle to protect their countries from the ill-effects of the coronavirus pandemic. The decision of ECB to purchase bonds worth €750 billion had only come last week where it had relaxed several of its restrictions allowing it to buy a diverse category of debt belonging to both private and government segments to stave off the eurozone countries from falling into a recession.

As a result of the ECB announcement, the bond yields of sovereign instruments across Europe have been falling. Investors have been queuing up for these bonds as they would be able to sell it back to the ECB at a higher margin when it starts the purchase scheme. After the ECB announcement, Italy's ten-year bond yields premiums fell nine basis points to stand at 171 yesterday after having touched a high of 323 earlier this month. Similarly, Germany’s 10-year bond yields also fell seven basis points yesterday to stand at 0.33 per cent, and 10-year Greek bond yields also fell 64 basis points to reach a low of 1.72 per cent. ECB’s new announcement has raised the fortunes of bond traders in the continent by several notches as they have not witnessed such a reinforced demand for these instruments in a very long time. They will now be able to shift the risks to the ECB quite comfortably and help provide the much-needed liquidity to the markets.

Since the beginning of the coronavirus outbreak, the European Union has been the most battered region in the world. Today it has become the epicentre of the epidemic with the greatest number of infections and the greatest number of deaths because of the coronavirus infection. Several countries in Europe have announced a number of quantitative measures and policy initiatives to prop up the fragile state of their economies. The United Kingdom lowered its interest rates thrice in a period of one month. It has also announced several large stimulus packages and loan guarantee schemes to help the British economy endure the onslaught of the pandemic. Elsewhere, in Italy, the government has allowed payment holidays on several types of taxes and utility payments to deal with the deteriorating condition of their businesses. Germany and Spain have also announced several large stimulus packages to help their local businesses along the same lines as well.

Many large and small countries in Europe have a large portion of their GDP coming in from the tourism industry with a large number of tourists from Asia, Americas and from within Europe thronging into multiple destinations in the continent. The revenues of this industry, in turn, support the European hotel, travel and food and beverage industries, which in turn employ millions of workers. The travel industry led by the airline sector has been the hardest hit by this pandemic in Europe and is losings millions by the day. The International Air Transport Association in its report on the impact of the pandemic on the airline industry dated 5^th March 2020 had said that in the worst-case scenario, the European Air travel markets of Austria, France, Italy, Germany, Netherlands, Norway, Spain, Switzerland, Sweden and the United Kingdom would be the hardest hit, losing as much as 24 per cent of its passenger base, which clearly has been the state of affairs since that date. Similar is also the case with railways and road transport operations across Europe that have witnessed a slide in demand by passengers and cancellation of old bookings leading to many of the pre-scheduled journeys being postponed indefinitely. Given the massive deterioration in the situations, experts warn that the unemployment levels will reach massive proportions in the continent within the next few months.

Elsewhere in the world also, central banks have announced massive quantitative measures and policy initiatives that have propped up sentiments in their bond and equity markets. The United States just a few days back announced a stimulus package of $2 trillion, which involves direct cash transfers to citizens, small-sized businesses and large corporates to fight the pandemic. Previously the US Federal Reserve had lowered its interest rates multiple times to help out the economy but clearly as days pass, the severity of the situation intensifies with more such measures required. Australia has also lowered its bank rate to a low of 0.5 per cent while on the other hand, Japan has launched a massive programme to repurchase bonds in order to help their respective economies out of this crisis. Most recently, the G20 countries have pledged to invest $5 trillion in the global economy to aid in the process of revival.

However, there is a growing concern among experts if at all this myriad of quantitative and policy measures aimed at pumping in more liquidity into the world economy would meet the intended objectives. This massive flow of liquidity into the countries’ economies though intended to create demand and arrest recession may not actually deliver the desired results. The problem presented by the pandemic to the world economy is more structural in nature than cyclical. Producers around the world are not able to manufacture, although there is demand and merchandise is not able to reach the intended consumers, although there is enough in stock available with the suppliers. The heightened flow of money in such a situation may not be able to address the logistical situation and could lead to heightened inflationary conditions which in the medium term could prove to be harmful to the countries.

The outbreak of the virus has also led to restricted movements of people and goods across the world. Basic commodities like ores and minerals, semi-finished goods as well as general merchandise are either waiting in warehouses to be loaded into cargo vessels or are sitting idle in vessels waiting to be unloaded at their destinations. Consequently, manufacturing activity across the world has also come down with several national and international companies issuing revenue and profit warnings for the entire year.

It is highly likely that more monetary, as well as fiscal measures, may be announced by the ECB in the near future. The crisis in the continent is deepening by the day, as the number of infected cases and the number of deaths is on the rise. More stringent policy action will be required by the ECB to address the full impact of the pandemic, which is still evolving. The present quantitative measure would only help business in the Eurozone stay afloat until better times prevail.