Bloomberg News

Dutch Debt Regains Allure on Politics: Euro Credit

May 29, 2012

Mark Rutte, Dutch prime minister. Photographer: Michele Tantussi/Bloomberg

Mark Rutte, Dutch prime minister. Photographer: Michele Tantussi/Bloomberg

The Netherlands is back in favor among bond investors attracted by its fiscal record and return to political stability as they seek havens from Greece’s potential exit from the euro area.

Dutch bonds have delivered the third-biggest returns in the world since April 23, when Prime Minister Mark Rutte offered his Cabinet’s resignation before winning opposition parties’ support for an austerity package three days later. Dutch 10-year yields stayed below 2 percent during each of the past eight trading days, falling to an all-time low of 1.759 percent today, a drop of 54 basis points since April 24.

Investors are turning to the Netherlands for refuge in one of Europe’s remaining AAA rated nations as market turbulence worsened after inconclusive Greek elections fueled bets the currency area is heading for a breakup. The austerity agreement reached between Rutte and three opposition parties, which includes raising the so-called value added tax to 21 percent from 19 percent, eased concern the country would miss its deficit targets, making its bonds an alternative haven to the record-low yields of Germany.

“The decisive factor was the willingness to cooperate from the opposition parties,” said Martti Forsberg, a portfolio manager at Nordea Investment Management in Helsinki, who added to his holdings of Dutch bonds after the government collapsed. “There is no question that the Netherlands is one of the strongest countries in Europe together with Germany.”

Forsberg is responsible for the management of about 2.5 billion euros of European debt.

Dutch Spread

Since April 23, the extra yield, or spread, that investors get for holding Dutch 10-year bonds instead of similar-maturity German bunds has narrowed 39 basis points to 40 basis points as of 10:26 a.m. London time. Demand for the securities rose after Rutte’s Liberals agreed with the opposition on a package to meet the European Union’s budget deficit limit. The next elections are due Sept. 12.

The European Commission is due to make policy recommendations to the Netherlands and other EU states tomorrow based on their medium-term budgetary plans submitted last month.

The euro area’s fifth-largest economy expects to save 12.4 billion euros next year by raising taxes and cutting spending, the caretaker government said in a plan published May 25. It pledged to lower the budget deficit to 3 percent of gross domestic product in 2013 from 4.2 percent this year, which is lower than a 4.6 percent estimate made in March.

Austerity Measures

Investors are betting that measures such as increasing the pension age ahead of schedule, reducing tax breaks for commuters and increasing contributions to health-care costs will remove the threat of credit downgrades after Standard & Poor’s changed its outlook on the Netherlands to negative on Jan. 13.

While Holland’s budget deficit is forecast to exceed the average for the 17-nation euro region in 2012, the nation had surpluses in the two years before the start of the financial crisis in 2009.

“The Dutch have a good track record in keeping their deficit low, and while they’ve had some problems, the long-term perspective counts most for investors and there’s nothing to get overly excited or worried about,” said Piet Lammens, head of research at KBC Bank NV in Brussels.

Even with the $779 billion economy mired in its second recession in three years, the Netherlands’ borrowing costs for 10 years have plunged relative to the U.S.

The spread over similar-maturity Treasuries was three basis points, down from 73 basis points in November, as Dutch bonds benefited from the nation’s status as one of the euro area’s four AAA rated economies, along with Germany, Finland and Luxembourg.

Relative Returns

Dutch government bonds have returned 3.9 since April 23, trailing behind France and Austria among 26 indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities slipped 2.3 percent in the same period, while German bunds rose 2.1 percent. Greek securities tumbled 31 percent.

“The rapidity with which the caretaker government was able to come to an agreement with the opposition parties as regards an austerity package did much to reassert the country’s core status,” said Richard McGuire, a senior-fixed income strategist at Rabobank International in London. “There is enough cross- party support for the necessary measures to bring the budget under control.”

Greece’s future in the common-currency bloc was thrown into doubt following last month’s elections when the Syriza party, which wants to annul the nation’s bailout, finished second, forcing another vote scheduled for June 17.

Spanish Yields

Borrowing costs in high-deficit countries such as Spain and Italy have risen. Spanish 10-year bond yields are above 6.4 percent amid concern the nation’s regional governments may lose access to capital markets.

The Dutch market has put “political problems on the sideline given that there are so few high-quality alternatives out there,” said Michael Leister, a rates strategist at DZ Bank AG in Frankfurt. “Investors are happy to get at least some pick-up over bunds. They went for the mix of credit quality and decent pick-up, though it’s obvious the political problems will be with us for a while.”

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net; Fred Pals in Amsterdam at fpals@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net


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