It’s been a surprisingly good year for Europe’s government bond markets. Yields are down across the board even though the European Central Bank is no longer adding to its 2.7 trillion euro ($3 trillion) bond stockpile.

The central bank might not be adding to its holdings, but it’s still maintaining them at that vast level and that has a positive effect. Quantitative easing is the gift that keeps on giving; it’s a key factor in why German 10-year benchmark bonds have negative yields again, pushing down much of the rest of the European sovereigns.

When yields are this minuscule, even the ECB’s reinvestment of the money from maturing bonds – to maintain that 2.7 trillion euro stock – has a disproportionate effect on prices. It means there’s little left to satisfy demand once the central bank has done its buying. The ECB has bought 5 billion euros less of German bonds than planned this year, but that has made no difference as it equates to less than 1% of its bund holdings.

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Most euro area countries have taken full advantage of frustrated investor demand to get ahead of their annual funding needs, helping to feed the broader boom in new issues. The Netherlands has already completed two-thirds of its 2019 issuance schedule, with Belgium and Austria well over halfway. Even Greece successfully brought new five- and 10-year bonds and Cyprus managed to bring a 30-year issue.

Japanese funds have been big buyers of French debt this year but they’re also looking for alternatives to the the super-low yields of the core euro nations. Burgeoning demand from Japan and elsewhere has seen Irish yields halve to 50 basis points and Spanish 10-year yields hit a record low of 87 basis points. Surely Spain now qualifies as semi-core and no longer peripheral.

Even more startling is Portugal, which is not far behind its Iberian neighbor with 10-year yields near 1%. Its total return this year (which reflects the 10-year’s yield and the increase in its value) is the best in Europe at 5%, exceeding Spain’s 4.5%. It helps that the ECB has bought 1.7 billion euros of Portuguese debt this year – proportionately the central bank’s biggest such investment in the euro area – as it re-balances previous under-buying. This ECB over-buying has only accentuated the scarcity for other purchasers.

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But one notable euro member is missing out: Italy. Its 10-year yields have fallen only 10 basis points this year, the worst performer by far. This ought to serve as a wake-up call for the populist League-Five Star government on all the cheap money it is missing out on because of its budget tussles with Brussels – but it probably won’t.

One things for sure, though: The ECB is still the main game in town in Europe’s bond market.

To contact the author of this story: Marcus Ashworth at mashworth4@bloomberg.net

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

©2019 Bloomberg L.P.

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