Euro zone yields fall as slew of new supply is snapped up
LONDON — Euro zone bond yields dipped on Thursday ahead of a wave of new debt issuance, as well as U.S. consumer inflation data that could set expectations for the course for monetary policy in the United States and beyond.
January usually brings heavy volumes of new debt supply, which typically meets with good demand.
Thursday brings a slew of bond auctions, with Spain, Italy, France, the Netherlands and Norway all scheduled to sell new debt of varying maturities.
This week alone has already seen around 30 billion euros in new issuance from euro zone governments, according to Reuters calculations.
“You can find arguments for that in that normally, at the start of the year, you do see a lot of issuance, but the investors come into the new year with new risk mandates,” said Jan von Gerich, chief analyst at Nordea.
Individual euro zone governments will get stiff competition for their debt from the European Central Bank, which plans to start offloading some of the vast holdings of bonds it has amassed over the past decade.
Fixed-income strategists at BNP Paribas say 2023 will be one of “extraordinary” supply.
“Gross supply is set to rise to 1.25 trillion euros across the 11 largest issuers in the eurozone, an increase of 160 billion euros compared to 2022’s 1.09 trillion euros,” they said.
In net terms, BNP Paribas forecasts there will be 462 billion euros of issuance in 2023, up from 2022’s 367 billion.
“I think it will become more challenging as we get towards the spring, when the heavy issuance continues. A lot of investors will have used up part of their mandate and QT will start as well,” Nordea’s von Gerich said.
“Right now, it’s looking good.”
Yields on the 10-year German Bund fell 4 basis points (bps) to 2.142%, dropping for a second day, thanks in large part to the dive in regional energy prices this week, which has alleviated some of the concern about the inflation outlook.
“Growing optimism about the inflation outlook led to a major rally in sovereign bonds yesterday, particularly in Europe,” Deutsche Bank strategist Jim Reid said.
“In part, that was driven by a fresh decline in natural gas prices, which were down 5.56% yesterday to 65.45 euros per megawatt hour, just above their one-year closing low last week,” he said.
Final euro zone inflation data for December is due next week. Readings so far from major economies such as Germany, Spain and Italy show a definite cooling in headline inflation, although the underlying core measures remain well above the ECB’s 2% target rate.
U.S. inflation data is due at 1330 GMT and is expected to show the headline figure slowed to 6.5% in December from 7.1% in November.
With a more benign price environment and good demand for new bonds so far in January, the debt of more highly leveraged nations such as Italy has performed strongly.
The spread between Italian 10-year bonds and those of Germany has contracted by nearly 15 bps this week to its narrowest in a month, thanks to the outperformance of Italian debt, even in the face of chunky new supply.
On Thursday, Italian 10-year yields were down 6 bps at 3.983%, at their lowest since Dec. 15.
Spanish 10-year Bonos were down 4 bps at 3.157%, while French OATs last yielded 5 bps less at 2.632%. (Reporting by Amanda Cooper; Editing by Kevin Liffey)
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