Global Bonds Plunge Ahead of Debt Deluge From Pandemic Defense

(Bloomberg) —

European sovereign bonds led a global rout as markets braced for the kind of supply surge not seen for years, after nations from the U.K. to France and Italy unveiled plans to spend their way out of the coronavirus crisis.

Investors are pricing in the risk of a surge in government borrowing to fund stimulus aimed at offsetting the economic shock from the pandemic. Italian yields jumped as much as 64 basis points, while those on German debt surged back above 0%. Rates on U.S. Treasuries extended their advance after clocking up the biggest jump since 1982 on Tuesday.

Some $1.14 trillion in fiscal support has been pledged or is under consideration as governments around the world rush to contain the coronavirus and shore up financial markets and businesses. Pledges by Germany and France to guarantee hundreds of billions in bank loans boosted the global tally.

“Given the massive fiscal stimulus, rates have to go,” said Jens Peter Sorensen, chief analyst at Danske Bank A/S. “It goes for Treasuries, BTPs, bunds, Spain, France, you name it.”

While it isn’t surprising that the debt of nations deemed more vulnerable to the outbreak have taken a hit, it’s striking that bond spreads are widening when even the benchmark — German yields — is rising. That suggests that the prospects of fiscal expansion and more bond sales are moving markets.

“This is hard to rationalize given one would tend to think that risk aversion should operate as a zero-sum game wherein safe havens such as bunds are the beneficiaries,” Rabobank strategists including Richard McGuire wrote in a note. “Investors appear to be pricing in a sizable budgetary deterioration throughout the euro area.”

(Updates with details.)

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