Bond issue in crowded market will be a test for Greece after all the bad fiscal data

LONDON – The eurozone government debt market faces a busy round of supply next week with up to about 20 billion euros of expected offerings, paltry reinvestment flows and a test for Greece in a 5-year issue. Next week’s highlights include a 7-billion-euro reopening of the 2-year German Schatz; Greece’s 5-year, 5-billion-euro syndicated bond deal; 1-2 billion in Dutch 5-year paper and an expected 5-6 billion of 5- and 15-year debt from Italy. With little if anything in the way of redemptions expected and only about 1.2-1.3 billion euros’ worth of coupon payments in the pipeline, analysts say the market’s demand for shorter dated paper will be measured thoroughly. «Next week we have only 1.2 billion euros in reinvestment flow so that will add up to about 19 billion net negative cashflow in the market,» said Wee-Khoon Chong, European rates strategist at RBS Financial Markets. «So the net cash flow is quite largely negative and I think this should add some pressure to the market in the 2- and 5-year (sector) – especially 5-year because we have the Greece 5 billion and also the tap of the 5-year Italy bond as well.» He expected the bid/cover ratio on the German Schatz to be «around average» in the neighborhood of 2. Last month’s sale of 2-year German paper was covered 1.9 times. Tough test for Greece Analysts say it could be tough going for Greece. Banking sources expected the 5-year, 5-billion-euro syndicated bond deal by Greece – the eurozone’s lowest-rated issuer – to be priced by mid-week. «This syndication will be somewhat more difficult than the previous ones,» said Job Piet, fixed-income strategist at Rabobank. «It depends a bit on the spread at which they will issue, because if it is cheaper than surrounding GGBs (Greek government bonds) then still people could consider it an attractive bond to buy or switch out of existing GGBs into the new one.» Greece’s issue comes to market after Thursday’s slightly disappointing 5-year Spanish auction and a not-so-impressive 10-year issue from France. The Greek sale also comes after a widening of yield spreads for peripheral eurozone borrowers over core issuers and persistently negative news on Greece’s fiscal position. Huge revisions to Greek budget data have shown it breaking the EU’s 3.0 percent of GDP deficit cap every year since 1997, though the European Commission on Wednesday praised Greece’s plans to slash its budget shortfall. «The Greek sale, I think, will be most interesting given the recent deficit saga on Greece and recent spread widening,» Chong said. «That should provide a test of investors’ demand, of whether the yield-grabbing activities still remain the dominating factors.» The bright side On the plus side for Greece, some analysts say the market will have already discounted a lot of bad news so impact on the issue itself could be limited. However, with supply concentrated in 2- and 5-year paper, prices in those sectors of the yield curve could soften. Meanwhile, comments on Thursday by European Central Bank President Jean-Claude Trichet that rate cuts were not an option – even though eurozone data have been mixed – will limit upside price movements at the front end of the curve. «Five-year has been outperforming the curve over the last couple of weeks and most of the supply next week is 5-years – the vast majority – so I would think it probably will weigh on the market at the front end a little bit,» said Monique Wong, European fixed income strategist UBS. «There’s 7-billion, 2-year Germany and I’ve been thinking that the short end of the European curve is quite expensive so I would expect that to come under some pressure as well.» Interest rate sensitive two-year bond yields have fallen almost 25 basis points (0.25 percent) in the last 3 weeks.

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