ROME: Italian bond yields inched up on Monday as the country kicked off the busiest week for euro zone sovereign debt sales in almost a year.
Italy sold 7.5 billion euros of bonds at auction and is the first of five countries scheduled to sell debt this week in what could see around 40 billion euros of new bonds issued.
Usually such volumes would push yields sharply higher in secondary markets as investors make room for new debt, but worries that the ECB’s purchase scheme will hoover up many of the tradeable bonds have pinned borrowing costs near record lows.
The European Central Bank bought 9.16 billion euros worth of government bonds in the fifth week of its scheme, a slower pace than a week earlier but analysts expect it to step up the pace in coming weeks to meet its monthly target.
“The supply and demand story seems to be trumping everything,” said Rabobank’s Lyn Graham-Taylor, adding that signs of inflation picking up was also not being reflected in bond market pricing.
Calculations from Commerzbank show that this week is set to bring the largest gross issuance since May 2014, with almost double the 22.5 billion euro year-to-date weekly average on sale.
Italian 10-year yields were up 2 basis points at 1.24 percent, not far off a record low of 1.03 percent, after the country sold three-, seven- and 15-year bonds.
The 15-year bonds were sold at an average 1.64 percent yield, a new record low which compares with a yield of 2.10 percent when the line was last sold in February.
Rome also kicked off the sale of a new inflation-linked BTP Italia bond targeted at retail investors.
German 10-year yields, the euro zone benchmark, were flat at 0.158 percent, a fraction above a low of 0.14 percent hit last week. German bonds with maturities out to eight years now have yields below zero, meaning investors are effectively paying to lend the country money.
Berlin will sell up to 4 billion euros of 10-year debt on Wednesday, while the Netherlands, Spain and France also have auctions scheduled for this week.
Net issuance in April is nevertheless likely to be low, Barclays’ strategists said, with 63 billion euros of gross issuance offset by 94 billion euros of redemptions, resulting in negative net issuance this month of 31 billion euros.
While net issuance is set to pick up in May and June, the overall outlook underlines the draining effect of the ECB’s planned 60 billion euros a month of bond purchases, which analysts believe will keep yields pinned at historic lows.
“The next three months combined will see a net issuance need of just 65 billion euros; moreover, we estimate projected ECB QE buying of just more than twice that figure,” said Barclays.
