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Foreign investors dumped eurozone bonds last year – the first time since the introduction of the single currency – as record amounts of central bank stimulus coupled with major political shocks has cooled overseas demand for the continent’s debt.

Overseas bond holders reduced their net holdings of eurozone debt by €192bn in 2016, reversing an increase of €30bn the year before, according to data from the European Central Bank.

Sovereign bonds made up a bulk of the sales at €116bn, with the ECB claiming most of the selling was down to its stimulus programme which has snapped up over €1tn of government bonds since March 2015.

The data hints at cooling foreign demand for eurozone assets in a key election year which will pit populist and eurosceptic forces against the continent’s traditional pro-EU parties.

Despite a disappointing performance for anti-Islam candidate Geert Wilders in the Netherlands’ elections last week, investors are still nervously eyeing Marine Le Pen’s promise to withdraw France from the eurozone ahead of a vote in the eurozone’s second largest economy in April and May.

Japanese investors registered their biggest retreat from French sovereign debt since the eurozone crisis in the three months to January.

The ECB also noted a “heightened risk aversion” among investors towards euro denominated debt in the wake of the Brexit vote in June.

The selling “may be linked to the temporary increases seen in financial stress indicators following the United Kingdom’s referendum on EU membership in June 2016″, said the central bank.

ECB stimulus measures have helped keep a lid on eurozone government borrowing costs for two years as the central bank has been snapping up assets worth €80bn a month. But signs of market stress have reemerged in recent months as policymakers will begin to scale back their buying from next month and are eyeing a notional end date of December 2017 for a QE exit.

With anti-euro parties now part of the political fabric in the Netherlands, France, Germany and Italy, this redenomination risk “cannot be ignored with important consequences for both investors and policymakers alike”, said Andew Bosomworth, head of portfolio management at Pimco.

“Investors cannot ignore the potentially large exchange rate changes posed by a country leaving the euro, even if that probability is very low, creating a disincentive to commit to long-term, cross-border investments and hampering the formation of a capital markets union” said Mr Bosomworth.

Portuguese and Italian 10-year bonds are the worst performing eurozone assets over the last 12 months, with yields up over 100 basis points. Both economies have debt to GDP piles over 130 per cent – the highest after Greece – and posted growth below the eurozone average last year.

Despite retreating from bonds, foreign investors were still net buyers of eurozone stocks at a pace of €126bn, down from €268bn in 2015.

Copyright The Financial Times Limited 2017. All rights reserved.
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