In 2016, non-euro investors dumped euro-denominated bonds for the first time in history.
Moreover, euro-area investors barely made purchases according to the ECB’s analysis of euro area net portfolio investment outflows.
Annual net purchases of non-euro area debt securities by euro area investors totaled €364 billion in 2016, only slightly below the all-time high of €382 billion that was recorded in 2015. However, this masks the fact that the fourth quarter of 2016 saw euro area investors become net sellers of non-euro area debt securities, the first time this had happened since the second quarter of 2012.
Net sales of non-euro area debt securities totaled €26 billion in that quarter. Euro area residents’ net investment in non-euro area equities remained subdued in 2016, totaling €12 billion.
Non-euro area investors were net sellers of euro area debt securities in 2016 – the first time that had happened since the introduction of the euro. Their net sales of euro area debt securities totaled €192 billion in 2016, compared with net purchases of €30 billion in 2015.
Euro-Area Investors Shift Towards US
The non-euro area investment community dumped euro-denominated bonds but euro-area investors did not pick up the slack.
Euro area investors also become net sellers of non-euro area debt securities in the fourth quarter.
Instead, euro-area investors shifted to the US.
According to data available for the first three quarters of 2016, euro area residents’ net purchases of non-euro area debt securities in that period consisted almost exclusively of long-term debt instruments and largely reflected transactions by “other financial corporations”. This group of corporations – which includes investment and pension funds, as well as insurance companies – accounted for around 74% of the euro area’s net purchases of non-euro area debt instruments in that period, with “other private entities”2 and MFIs excluding the Eurosystem accounting for 14% and 7% respectively. Around 40% of the non-euro area debt securities that were purchased by euro area residents were issued by non-euro area governments, with securities issued by non-euro area MFIs, other financial corporations and other private entities accounting for the remainder (around 20% each).
Investors Dump Italian, German Bonds
Country-level data show net portfolio investment outflows for the largest euro area countries, driven by foreign investors’ net sales of domestic debt securities and domestic investors’ net purchases of foreign assets.
The largest net sales of debt securities by non-domestic investors were recorded in Italy (4.1% of GDP), followed by Germany (3.1% of GDP) and Spain (1.8% of GDP), while non-domestic investors were net purchasers of French debt securities (with net purchases totaling 1.2% of GDP).
What’s Going On?
It’s mathematically impossible for everyone to dump bonds because for every seller there is a buyer. Yet, both foreign and domestic investors did dump euro-denominated bonds. To whom?
The buyer of last resort of course: The ECB. The ECB’s scheduled purchase of euro-denominated bonds was €80 billion a month in 2016, providing ample opportunity for those wanting to unload those bonds to do so.
Mike “Mish” Shedlock