BofA: Fiscal Tightening, But Still High Bond Supply

Bank of America expect “Eurozone government funding needs to decline in 2024 relative to 2023. This fiscal tightening can be easily covered by phasing out energy support measures.”

• “However, also because of the acceleration of passive ECB QT flows, net-net EGB supply is unlikely to drop. Timing-wise, because of large redemption flows in Q124 vs the prior year, the impact of high issuance in 2024 may be felt more in Q2.”
• “Even if our numbers still present upside risks, we would caution against taking this as a major rationale for a bond short. In fact, on a number of metrics, Q1 this year was a much harder challenge from a supply perspective and yet EGBs fared much better than expected. A decline in volatility and the expected arrival to terminal rates can keep demand supported also in 2024, even if positioning is currently long.”
• “On a cross-country level, France stands out as the issuer where supply pressures may be the strongest. Periphery sees high forecast uncertainty from NGEU tranche timing, Germany from "off-balance sheet" fund usage. The acceleration of QT may be more impactful for German regions/agencies and supras.”