German yields touch two-month high, Italian yields fall as focus on issuance

The Netherlands raised 1.98 billion euros from the re-opening of a bond due 2052. Germany's 10-year yield, the benchmark for the euro zone, briefly rose to a two-month high at -0.302% and was last up a basis point (bp) to -0.32% by 0950 GMT.

Benchmark German 10-year yields rose to a two-month high on Tuesday and Italy's risk premium fell to the lowest in a month as investors focused on debt issuance. The European Union was due to raise 9 billion euros ($10.6 billion) from the issuance of a new, syndicated seven-year bond to back its coronavirus recovery fund. Its first market outing since the summer break, the deal has received over 85 billion euros of investor demand, according to a lead manager memo seen by Reuters.

More supply came from auctions. Germany raised 3.908 billion from the re-opening of a two-year bond. The 4.804 billion euros of total demand fell short of its 5 billion euro target in what analysts called a "technical failure", though it is not unusual as the last four two-year German bond re-openings have all failed, according to Refinitiv IFR.

In contrast, Italy raised 5.75 billion euros from the re-opening of three, seven, and 30-year bonds to high demand, paying the lowest yields since February, March, and January on the respective bonds. The Netherlands raised 1.98 billion euros from the re-opening of a bond due in 2052.

Germany's 10-year yield, the benchmark for the eurozone, briefly rose to a two-month high at -0.302% and was last up a basis point (bp) to -0.32% by 0950 GMT. Its yield curve, as measured by the gap between two and 10-year yields, briefly widened to 39.4 bps, the widest since early July.

Althea Spinozzi, a fixed income strategist at Saxo Bank, said heavy supply was driving bond yields higher. But Italian bond yields, which had also risen, fell after the country's auction closed.

The 10-year yield dropped 1.5 bps to 0.67%, pushing the closely watched gap between 10-year Italian and German yields to 98 bps, the lowest since mid-August. The Italian auction result "highlights the fact that the ECB was successful in delivering a dovish-taper and that government bonds with a high beta are poised to gain the most," Spinozzi said.

The European Central Bank slightly slowed the pace of its pandemic emergency bond purchases last Thursday but calmed fears around a potentially more hawkish move. Italian bonds, particularly longer-dated ones, are seen as "high beta", as they are more volatile than the broader bond market.

The other main focus is U.S. inflation data. Due at 1230 GMT, it will be watched closely before next week's U.S. Federal Reserve meeting. It is expected to show consumer prices rose 0.4% in August, down from 0.5% in July, according to a Reuters poll, providing further evidence that inflation may be starting to cool.

($1 = 0.8469 euros)

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