Central banks ramp up buying at euro zone bond sales

By Yoruk Bahceli

LONDON (Reuters) -Central banks have ramped up buying at euro zone bonds sales this year, data shows, in a positive sign for the euro as the bloc looks to benefit from diversification away from U.S. markets.

U.S. President Donald Trump's confrontations with longstanding allies over trade and security, along with attacks on the Federal Reserve, have raised concerns around the safe- haven status of the U.S dollar, the world's No.1 reserve currency, which has tumbled 9% this year.

The euro meanwhile has surged 12% and policymakers are keen to seize the moment to boost its role as a reserve currency. Higher demand from central banks, which manage trillions of dollars in currency reserves, is therefore notable.

Official institutions, which include central banks and sovereign wealth funds, have bought a fifth of euro zone government debt sold at syndications year-to-date, up from 16% for the whole of last year, a Barclays analysis showed, using debt management office data.

Debt sales where official institutions were allocated large shares include 55% of a 30-year German bond sale a day after the country announced a historic shift to looser fiscal policy in March, and 27% of a 10-year Spanish bond sale in May.

Syndications, through which governments hire banks to sell bonds directly to investors, allow for results to be closely tracked to monitor shifts in demand.

Syndicated sales raised over 200 billion euros ($232.40 billion) last year for euro zone governments, and are a key source of funding.

Allocations to official institutions did not increase in 2024, the data showed, after rising from 8% in 2021, following which euro zone interest rates turned positive after almost a decade of below-0% rates.

ASIA DEMAND

Bankers who run the debt sales said demand from Asian institutions stood out this year and was spread across the board.

"Some Asian clients in particular are coming back into the euro zone government bond space," said Benjamin Moulle, global head of primary credit for sovereigns, supranationals and agencies at Credit Agricole CIB.

"Large Asian central banks are very confident, more comfortable than previously when it comes to investing in EGBs."

Political stability in Europe, relatively lower budget deficits and lower inflation which gives the European Central Bank more room to cut rates further if needed, made the region's debt attractive to central banks, Moulle said.

Carla Diaz Alvarez de Toledo, director general for treasury and financial policy at Spain's economy ministry, told Reuters the country was seeing higher demand for its bond sales over the last two years from official institutions in the Nordics, Middle East and Asia.

While rising demand for the bloc's debt is positive, bankers stressed it was too soon for central bank reserve managers to be shifting currency allocations meaningfully in response to developments this year.

Central banks may be shifting their euro zone bond holdings into longer maturities as they had not really been buying long paper in recent years, said a second banker who arranges government debt sales.

They remain U.S. dollar-focused and usually adjust their asset allocation models later in the year, so a major change will not have happened yet, the banker said, asking not to be identified.

"What's actually happening on the ground, that is incredibly hard to say," said Rohan Khanna, head of euro rates strategy at Barclays.

"I have had these conversations with sovereign wealth funds out of China, out of Europe. Their viewpoint has been that it's too early."

While such investors are considering whether to invest incremental flows they received outside the U.S., they acknowledged that the U.S. Treasury market does not have a real alternative, Khanna said.

($1 = 0.8606 euros)

(Reporting by Yoruk Bahceli; Editing by Dhara Ranasinghe and Rachna Uppal)