Euro zone bond focus turns to supply after sharp sell-off


By Yoruk Bahceli

AMSTERDAM, Aug 26 (Reuters) - Euro zone bond markets turned their focus to a pick-up in supply on Wednesday, with yields continuing to inch up after a hefty sell-off a day earlier saw key assets suffer their biggest daily losses since May.

Market levels stabilized after both safe-haven German government bond yields and those of their riskier Italian peers saw their biggest daily jumps in nearly four months on Tuesday, with a boost to risk appetite from German data and news on U.S.-China relations denting appetite for fixed income.

Analysts also said the anticipated pick-up in European bond issuance after the summer lull had put pressure on bond markets, where borrowing costs tend to rise ahead of sales as investors make room for the new debt.

Focus was turning to issuance as Finland gathered more than 27 billion euros ($31.9 billion) of demand for a 3 billion euro sale of 10-year bonds, according to a lead manager message seen by Reuters.

Finland's is the first syndicated sale from a euro zone government since late July. In syndications borrowers hire banks to sell the debt directly to end investors, allowing them to sell larger volumes and tap a wider investor base. Governments are using them to sell debt much more frequently than in the past, as they ramp up borrowing to fund coronavirus stimulus measures.

In Wednesday's auctions, the more common way governments raise debt, Germany sold 2.99 billion euros of 15-year bonds, receiving demand 1.5 times the amount sold, while Portugal sold 1.25 billion euros of seven- and 10-year bonds.

Richard McGuire, Rabobank's head of rates strategy, said he sees demand for debt sales "remaining very supportive on low- growth, second-wave risks, social unrest, geopolitical tensions and even a possible political crisis come the U.S. election should Trump attempt to ignore a defeat.

"We will of course be looking at the upcoming slug of issuance as part of an ongoing (reality) check regarding this favourable demand outlook," McGuire said of recent debt sales.

Germany's 10-year bond yield rose another 2 basis points to -0.40%, a 1-1/2 week high, a subdued move after a 7 bps rise on Tuesday DE10YT=RR. Italy's 10-year yield was unchanged at 1.09%, near a three-week high. IT10YT=RR

"With (Bund) yields back closer to the upper end of their recent ranges, however, the selling pressure looks set to subside and we turn less defensive again," Commerzbank's head of rates and credit research Christoph Rieger told clients.

The euro zone economy is growing in line with the path the European Central Bank projected in June and the bank's pandemic bond purchase scheme is working as intended, policymaker Peter Kazimir said.

($1 = 0.8464 euros)

(Reporting by Yoruk Bahceli Editing by Toby Chopra and David Holmes)

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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