Green Bonds and Inflation Combine to Send Europe’s Debt Tumbling

(Bloomberg) -- Germany’s sale of its first 30-year green bonds may have been a blockbuster but it piled pressure on European debt, already reeling from inflation concerns.

The country racked up record orders of more than 38.9 billion euros ($47 billion) for its 6 billion-euro offering. The sale -- Germany’s longest maturity for sustainable assets -- came on a heavy day of bond supply across Europe, helping push conventional German 30-year yields to their highest since 2019. Benchmark Italian yields headed toward 1% for the first time since September as traders bet an economic recovery will spur inflation.

Investors are paring holdings of haven assets in the secondary market as vaccines are rolled out to reduce the threat from the pandemic. Yet syndicated sales are still attractive for investors who know that if needed, they can offload bonds to the European Central Bank through an asset-purchase program that forms part of its aggressive stimulus package.

Bets on a recovery are shown by Germany’s 10-year breakeven rate, a gauge of inflation expectations, climbing to the highest level since 2014. The country’s inflation could briefly rise above 3%, ECB policy maker Isabel Schnabel said in an interview.

While markets have so far soaked up huge levels of borrowing by European governments to spend their way out of Covid-19, traders are on watch for any signs of weak sales, with the Netherlands and U.K. also issuing long-dated debt on Tuesday.

“Duration supply seems to be hitting markets pretty hard,” said Pooja Kumra, senior European rates strategist at Toronto-Dominion Bank. “That said, the long-end of European curves looks pretty steep, which provides some demand.”

Read more: German Investor Confidence Jumps to 21-Year High on Vaccines

Germany offered the green debt at two basis points below comparable nominal bond yields, according to a person familiar with the matter, evidence of a so-called greenium for environmentally-friendly debt that enables cheaper borrowing. The sale also helps the nation build out a full yield curve of such securities, the latest step in the development of a fast-growing market.

Europe has emerged as the leader in sustainable debt issuance, surging this year to make up nearly a quarter of all sales in the region. The European Union plans to finance almost a third of its 800 billion-euro recovery fund through green bonds.

Germany mandated Bank of America Corp, BNP Paribas SA, Citigroup Inc., Commerzbank AG, DZ Bank AG and HSBC Holdings Plc as joint lead managers for the sale of debt maturing in August 2050. Its previous five-year offering saw lukewarm demand in November, following a watershed 10-year debut in September.

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