ECONOMY

Euro area bond investors brace for government supply glut

euro-area-bond-investors-brace-for-government-supply-glut

Euro area government bond investors are preparing for a bumper week of debt issuance.

Sales are scheduled from all of the region’s five-largest economies and Portugal is set to auction bonds for the first time since July. At close to 30 billion euros ($34.1 billion), the week’s supply is almost 50 percent above the year-to-date average, according to Commerzbank AG, which is ranked first among dealers by Germany’s debt agency.

Euro area sovereign securities have outperformed over the past three months amid speculation the European Central Bank may expand its unprecedented asset-purchase program, even as the Federal Reserve moves toward liftoff. The US economy may be strong enough to merit a rate increase by year-end, Fed Vice Chairman Stanley Fischer said on Sunday in Lima, where he attended the annual meeting of the International Monetary Fund.

“The pipeline is very brisk,” said David Schnautz, a London-based interest-rates strategist at Commerzbank. “There is scope for yields to backup and reflect more what the Fed keeps telling us, so overall this is a good timing opportunity to sell something.”

Germany’s 10-year bund yield was little changed at 0.60 percent as of 10:20 a.m. London time, having climbed 11 basis points, or 0.11 percentage point, last week. The price of the 1 percent security due in August 2025 was 103.77 percent of face value.

Rate outlook

The Fed will raise US borrowing costs for the first time since 2006 in December, according to Commerzbank’s Schnautz. That may send the German benchmark bund yield up to 0.70 percent by year-end, he said. That’s below the 0.80 percent median forecast of economists surveyed by Bloomberg. Schnautz recommends buying Spanish bonds at current levels.

Spain’s 10-year debt yielded 1.83 percent Monday. The nation plans to auction bonds due in 2018, 2025 and 2030 on Oct. 15.

The euro region’s debt gained 2.5 percent through Oct. 9, compared with returns of 1.5 percent on US Treasuries and 1.9 percent on U.K. gilts, according to Bloomberg World Bond Indexes.

The ECB is “ready to use all the instruments available within our mandate to act, if warranted, in particular by adjusting the size, composition and duration of the asset- purchase program,” President Mario Draghi told delegates in Lima, according to comments published on the central bank’s website on Oct. 9.

[Bloomberg]