Record demand for EU bonds shows demand for safe assets, Italian yields rise

Christian Lenk, a rates strategist at DZ Bank, said investor attention would remain on the U.S. stimulus negotiations, with a deadline coming up later on Tuesday, and the record number of coronavirus cases in Europe. French bonds were also up 1 basis point.

Record demand for the European Union's first bond sale backing its funding spree to aid coronavirus-hit member states highlighted the demand for safer assets on Tuesday, while Italian yields rose to their highest in more than a week. All attention was on the bond sale - part of a funding program that will eventually grow the EU into one of the region's biggest borrowers - that has been awaited for weeks.

The sale of 17 billion euros of 10- and 20-year bonds drew 233 billion euros of investor demand, with 145 billion euros of demand for the 10-year bond alone the highest ever for any eurozone debt sale. The deal "shows strong demand for core bonds and core duration, probably as investors shun riskier assets, and price greater likelihood of more ECB easing by year-end", said Antoine Bouvet, senior rates strategist at ING.

The broader market was relatively steady on Tuesday. Ten-year German bond yields unchanged 1 basis point to -0.61%, but were still near their lowest since March hit last week when European coronavirus fears spooked markets. Christian Lenk, a rates strategist at DZ Bank, said investor attention would remain on the U.S. stimulus negotiations, with a deadline coming up later on Tuesday and the record number of coronavirus cases in Europe.

French bonds were also up 1 basis point. DZ Bank's Lenk said he did not expect the EU bond sale to have a major impact on borrowing costs for eurozone governments.

"We might see some repercussions on the micro-level, but I don't think we're going to see major disruptions." Italian bond yields rose to their highest in more than a week at 0.765%. The bonds, known as BTPs, which hit record low yields last week, have come under pressure from the rise in coronavirus cases in the country and the potential of delays to the EU's recovery fund.

A review of Italy's credit rating by S&P on Friday may also be putting pressure on the market, said Gareth Hill, fund manager at Royal London Asset Management, who has taken profits from his BTP holdings in recent weeks. S&P assigns the highest rating to Italy out of the three main rating agencies - two notches above junk - so a downgrade may bring back fears about the potential for the others to junk Italy.

Elsewhere, Germany sold 3.37 billion euros in a re-opening of a 2-year bond.