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Belgian Debt Agency Anticipates Sluggish Demand for Upcoming Bond Issuance

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Saboor Bayat
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Belgian Debt Agency Anticipates Sluggish Demand for Upcoming Bond Issuance

Belgium's Debt Agency is bracing for a lukewarm response to its upcoming government bonds issuance slated for December 11, in contrast to the robust interest witnessed in September. The reason behind the muted expectations? Significantly lower interest rates for these bonds compared to market yields. The 5-year bond offers a gross interest rate of 2.6%, and the 8-year bond is set at 2.9%. After accounting for a 30% withholding tax, these translate to net rates of 1.82% and 2.03% respectively.

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Interest Rates vs Market Yields

In stark contrast, the one-year bond offered in September carried a reduced withholding tax of 15% and a net yield of 2.81%. Jean Deboutte, the Director General of the Debt Agency, elucidates that interest rates on European markets have slightly dipped since the onset of October. Adding to the intrigue is an unusual scenario where short-term rates are soaring above long-term rates. Despite affirmations from central banks to the contrary, financial markets are anticipating a 100 basis point cut by the close of 2024. To brace for potential rate decreases and make allowances for distribution commissions to banks, the Debt Agency has deliberately set the rates lower.

Investor Response and Alternatives

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While the Debt Agency does not envisage a strong demand for these bonds, a significant degree of interest has been noted. Investors with an appetite for these bonds are likely to be those in the hunt for high-quality paper with annual coupons. However, alternative investment avenues such as secondary market state bonds (Olo) are promising higher net yields for similar maturities. The Olo 2031, for instance, is offering a 3% net yield, and the Olo due in June 2028 offers 2.86% net. Investors, however, have to bide their time until the Olo's maturity to realize these yields.

An Unattractive Proposition?

According to stockbroker Alexandre Goldwasser, these new state bonds don't hold much appeal. He laments that the favorable conditions offered in September weren't carried forward. With the European Central Bank (ECB) accepting Scope Ratings GmbH as a new external credit assessment institution, the dynamics of the European fiscal landscape may be in for some interesting turns.

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