Debt market tensions in Europe force some governments to rework trade rules

Oct 31 (Reuters) – Some eurozone countries have eased rules for banks handling their government debt trading to help them weather some of the toughest market conditions in years, officials said. officials at Reuters.

Of the 11 major eurozone debt management agencies contacted by Reuters, Dutch and Belgian officials told Reuters they had relaxed various market-making requirements dictating how those banks should trade their debt.

France, Spain and Finland said their rules are already structured to automatically account for market stress. Germany and Austria said they do not establish such rules.

As the European Central Bank unwinds years of buying the region’s debt, while war in Ukraine, an energy shock and unrest in Britain make investors wary of taking on government bonds, debt managers are adapting to a less liquid and more volatile market.

This could in turn increase borrowing costs for governments, already squeezed by rising interest rates and energy-related spending, and bring more uncertainty for institutions, such as pension funds. , who seek security and stability in public debt.

The bid-ask spreads for eurozone government debt, the difference between what buyers are offering and sellers are willing to accept and a measure of the fluidity of trade, have quadrupled since the summer of 2021, data compiled by MarketAxess (MKTX.O) for Reuters showed. The data tracked bonds from Germany, Italy, France, Spain and the Netherlands, markets that account for the vast majority of eurozone debt with nearly €8 trillion outstanding.

Bond bid-ask spreads soar


Wider spreads mean more volatility and higher transaction costs. So governments expect, and some formally require, their primary dealers — the banks that buy government debt at auction, then sell to investors and manage its transactions — to keep those values ​​tight.

In markets with formal requirements, they also face other “listing obligations” to ensure the best possible liquidity. These obligations have been relaxed in some countries to take account of increased market tensions.

Jaap Teerhuis, head of the trading floor at the Dutch Treasury, said several of his listing requirements, including bid-ask spreads, had been eased.

“Volatility is still significantly higher than before the (Ukrainian) war and ECB uncertainty has also led to more volatility and more volatility is making it harder for primary traders to comply,” a- he declared.

Liquidity has been declining since late 2021 as traders began pricing in ECB rate hikes, Teerhuis said. The Netherlands then relaxed its listing requirements following the invasion of Ukraine.

Belgium’s listing obligations also evolve with changes in trading conditions. But it has since March relaxed rules on how many times a month dealers are allowed to breach and also reduced the number of dealers required to quote on trading platforms, the head of its debt agency said. , Maric Post.

Both countries have also relaxed the rules during the COVID-19 pandemic. Belgium Post said it only lasted four months in 2020, but it kept the bonds much looser this time around.

Finland said it had not changed its rules, but could not rule out taking action if conditions persist or worsen.

Outside of the block, Norway has also allowed dealers to set wider bid-ask spreads.

In Italy, debt management chief Davide Iacovoni said on Tuesday he was considering adjusting the way he grades prime dealers each year to encourage them to quote tight spreads. Such rankings can affect banks that can participate in lucrative syndicated debt sales.

Debt offices where bonds automatically adjust said attempts to impose predetermined bid-ask spreads in volatile markets would discourage primary traders from providing liquidity and lead to more volatility.

“If the market is too volatile, if it is too risky, if it is too expensive, it is better to adjust the bid-offer to market reality than to force liquidity,” said debt chief Cyril. Rousseau at an event on Tuesday. .

September’s selloff in Britain highlighted how quickly liquidity can evaporate in already volatile markets in the event of a shock. In this case, the government’s big spending plans triggered major movements in debt prices, forcing pension funds to resort to runaway asset sales to meet collateral calls.


Allianz senior economist Patrick Krizan said with bond volatility near 2008 levels, a fragmented market for safe assets was a concern.

The eurozone is about 60% the size of the US economy, but it relies on the €1.6 trillion German bond market as a safe haven – a fraction of the $23 trillion US Treasury market .

In the case of a volatility shock “you can very easily fall into a situation where some markets really dry up,” Krizan said. “For us, this is one of the biggest risks for the eurozone.”

For example, the Netherlands, like Germany, has a triple-A rating. But like other smaller markets in the Eurozone, it does not offer futures, a key hedging instrument, and up now this year, the premium it pays on German debt has doubled to about 30 basis points.

Small governments pay a premium over their larger counterparts

The debt officials’ efforts are being welcomed by European primary traders, whose numbers have shrunk in recent years due to shrinking profit margins and tighter regulation.

Two senior dealer bank officials said meeting listing requirements under current conditions would require them to take on more risk.

“If (issuers) want private sector market making, it has to be profitable, or why would anyone? And it can’t be if rates move around 10 to 15 basis points. basis per day,” one said of moves of a magnitude rarely seen in these markets in recent years.

($1 = 0.9970 euros)

Reporting by Yoruk Bahceli and Dhara Ranasinghe; additional reporting by Belen Carreno in MADRID, Lefteris Papadimas in ATHENS and Padraic Halpin in DUBLIN; edited by Tomasz Janowski

Our standards: The Thomson Reuters Trust Principles.

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