During the last two years, eurozone banks have been diversifying their sovereign bond portfolios, reducing a home-country bias. This is welcome news, and we expect this trend to continue.
Fragmentation is frequently cited as a weakness of the eurozone. With regard to its financial markets, variation in national regulations and customs has given rise to market segmentation. Divergence of TARGET-2 balances or limited circulation of excess liquidity in the past are two examples.
However, as data recently published by the ECB show, in the past two years, banks have increasingly diversified their bond portfolios, buying bonds issued by other eurozone countries. This is positive for financial integration.
Our chart shows purchases of government bonds by eurozone banks since July 2022, when the ECB ceased its QE program. The data are provided by the ECB monthly and show purchases of bonds issued by domestic governments and purchases of bonds issued by other eurozone countries. Italian banks stand out when it comes to geographic diversification. In the last two years or so, they have cut their holdings of BTPs by around EUR 45bn and bought EUR 35bn of other EGBs, reducing overall exposure to European sovereign risk and achieving significant improvement in risk diversification. In the last 12 months, Italian banks have continued to invest abroad but in a more balanced way. Banks in Germany, the Netherlands, Portugal and Austria have also been very active in terms of geographic diversification, possibly as a result of their search for better yields. French banks have mostly been buyers of domestic debt, especially in recent months, most likely as a result of political tensions, which have led foreign investors to sell French government bonds. Aggregated figures show that purchases of bonds issued by non-domestic eurozone governments are now historically high.
Cross-border portfolio diversification is a welcome development. First, it signals that financial integration is improving. Banks seem more willing to exploit return opportunities, even if this means buying abroad. Second, it reduces banks’ exposure to episodes of volatility in domestic financial markets. Country-risk diversification is also a response to indications by regulators. In some jurisdictions, diversification appears very advanced. For example, in Portugal, domestic debt makes up just 30% of banks’ government-bond holdings. In other countries, such as Italy, Spain and France, home-country bias has resulted in domestic debt making up 70-80% of banks’ government-bond portfolios. Thus, there is room for more diversification.
The event will be closely watched by markets, as it is where China announces its growth target for the year, its main fiscal and economic policies and policy direction in strategic areas. For 2025, China set its economic growth target at about 5% and its fiscal deficit target at about 4% of GDP.
We expect the ISM Non-Manufacturing Index declined to 51.5, after falling by 1.2 points in January. Regional surveys for February showed a broad-based loss of momentum.
