Euro zone yields steady as market digests huge bond sales

Euro zone bond yields were mostly steady on Thursday following a hefty sell-off a day earlier as issuance and a German court ruling targeting an ECB bond purchase programme remained in focus. Spain sold 7.11 billion euros and France 11 billion euros of bonds at auction, as governments raise record of amounts of debt to fund coronavirus stimulus programmes.

The sales followed Germany's first syndicated bond issue since 2015 on Wednesday, which raised 7.5 billion euros alongside a 3.2 billion euro auction, a hefty amount of supply for markets to digest. That, together with the U.S. Treasury's announcement of a higher-than-expected increase in issuance, pushed 10-year Bunds to their worst trading session in a month. "The auction volumes of today's government bond sales come as a gentle reminder of the ECB's important role in keeping mounting debt levels affordable," ING analysts said on Thursday.

The German court ruling threatens to jeopardise one of the ECB's bond buying programmes (PSPP) unless it can show the scheme was proportional and has worried investors about the future of the ECB's emergency purchase scheme (PEPP). However, the Bundesbank will have to take the lead in persuading authorities that the ECB has not exceeded its powers to avoid compromising the ECB's independence, sources told Reuters.

Most 10-year euro zone bond yields were up around 1 basis point on the day , with Germany's benchmark at -0.50%. Spanish bonds underperformed, with 10-year yields up 2 bps at 0.95%. "Demand for the auctions that you've seen today has been fairly strong or fairly stable given the size… I think that is supporting the market," said DZ Bank strategist Christian Lenk.

Bond yields rise if markets come under selling pressure to digest new supply, which was not the case on Thursday. "Despite the high issuance volume we are going to have for many months... the market is still able to digest these very elevated issuance levels, always in the background is that you can always buy in the primary market and sell it later to the ECB system," Lenk said.

Italian bond were volatile, with 10-year yields rising above 2% in early trade for the first time in nearly two weeks , a level that some analysts say starts to throw Italy's debt sustainability into danger. After rallying, they were last unchanged at 1.98%. They climbed around 10 basis points on Wednesday in the broader market-sell off. Rainer Guntermann, rates strategist at Commerzbank, said the moves suggest "some investors remain at least irritated or concerned for the way forward for the ECB and whether this ruling out of Germany could change the purchase pattern in the future."

Germany's industrial sector is expecting an unprecedented collapse in production, the Ifo institute said, citing its industrial output index for the coming three months. European Central Bank chief Christine Lagarde will also be closely watched on Thursday, as she is scheduled to take part in a Bloomberg online webinar at 1400 GMT. ($1 = 0.9255 euros)