Analysts hail first ESM auction

Strategists have hailed a successful first bond auction by Europe’s new bailout fund, saying the eurozone sovereign debt crisis looked to be a step closer to being solved last week.

European markets have risen in recent months, particularly in the past few weeks, as fears that the single eurozone currency area was heading for a break-up looked increasingly unfounded.

And last week the European Stability Mechanism (ESM), the new ramped-up bailout fund for Europe which has replaced two other funds, sold €2bn (£1.64bn) of three-month bills.

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The ESM sold the bonds to Japan, which purchased the bonds – using foreign exchange reserves as a way to weaken its currency – as part of a ¥10.3trn (£72bn) stimulus package announced by Japanese prime minister Shinzo Abe last week.

Global strategist Dan Morris of JPMorgan Asset Management said ESM bonds would prove popular now that the worst of the eurozone fears had passed – enabling the bailout fund to raise enough money to be an effective tool for eurozone policymakers.

“Last October, sentiment was at its worst but not many people think a eurozone break-up is a risk anymore,” he said.

“These bonds offer a pickup in yield with no increase in risk. Asian banks have huge reserves and are more willing to buy into the euro than they used to be, and they may want to diversify.”

Frances Hudson, director of strategy at Standard Life Investments, agreed the timing of the issuance was key, especially as investors look for a way to exit US dollar holdings this year.

“Although these countries aren’t AAA, neither is Japan. Ratings are not the be all and end all and for an investor looking to diversify there isn’t much choice,” she said.

“All the quantitative easing going on in the US has weakened the dollar so that you are effectively investing in negative real returns because of loss through inflation, which isn’t attractive.”

The only cloud on the horizon, Ms Hudson said, was the possibility of Spain requesting a bailout and then being unable to meet the strict conditions imposed upon the loan.

Key numbers

€2bn (£1.64bn): The size of the European Stability Mechanism’s first bond auction

¥10.3trn (£716m): The size of Japan’s stimulus package, which included a plan to purchase bonds from the ESM

€700bn (£574.8bn): The amount of authorised capital the ESM is expected to have - €80bn in capital and €620bn to be raised through capital markets if needed