Sovereign bond cuts on agenda

European governments look set to lose the backing of their biggest group of creditors, with some of the region’s banks likely to trim the €1.72tn they own in low-yielding government debt in coming quarters, in a bid to boost profitability.

Banks have become increasingly important buyers of sovereign debt, with increased purchases helping to offset an exodus of foreign buyers. A decline in bank appetite could leave governments exposed to rising yields at a time when many still have large deficits to finance in the market.

A need to boost profit levels to meet new minimum capital levels is driving the switch, with some treasurers — mainly banks in the UK, Germany and France that have excess liquidity — concluding that low yields are no longer sufficient and that a re-balancing of portfolios is needed.