Euro zone governments are set to issue a record amount of bonds in 2025, marking the third consecutive year of high bond sales. This could exert additional pressure on borrowing costs, especially as the European Central Bank (ECB) is no longer in the market to absorb some of the supply, amid rising political and economic uncertainty.
Analysts and bankers remain confident that the over 660 billion euros ($694.52 billion) in net bond issuance will be absorbed by the market, with expectations for further ECB rate cuts making government bonds more attractive. However, they caution that the sheer volume of sales could lead to higher long-term borrowing costs compared to short-term debt, which remains anchored by the ECB’s rate expectations. This could cause the yield curve to steepen, meaning euro zone countries—already dealing with weak growth and political instability in Germany and France—may not see significant reductions in borrowing costs, even as the ECB cuts rates.
“I think overall it will be absorbed,” said Michael Krautzberger, global chief investment officer for fixed income at Allianz Global Investors. “But it’s one of the reasons why the euro curves could be quite a bit steeper as a combination of rate cuts at the short end and quite a bit of supply at the long end.”
Uncertainty surrounding national borrowing plans adds to the complexity, with pressures such as U.S. President-elect Donald Trump urging Europe to boost defense spending, and France’s 2025 budget at risk. Euro zone governments are expected to sell around 1.26 trillion euros in bonds next year, slightly down from 2024, as countries aim to reduce deficits after significant spending during the COVID-19 pandemic and the Ukraine war.
Crucially, the ECB will not be participating in bond purchases in 2025, after halting reinvestments from its previous asset purchase programs. As part of its quantitative tightening (QT) process, the ECB will stop reinvesting the proceeds from maturing bonds starting in January, resulting in a gap in bond demand.
Analysts estimate that investors will need to absorb between 270 and 420 billion euros in bonds that the ECB might have previously bought, depending on different assumptions about the ECB’s holdings. When considering redemptions, coupons, and QT, the effective bond supply to markets is expected to be between 660 and 670 billion euros next year.
