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UPDATE 1-Keep calm and carry on: peripheral bonds sell at record levels

Reuters | Updated: 13-06-2019 14:23 IST | Created: 13-06-2019 14:12 IST
UPDATE 1-Keep calm and carry on: peripheral bonds sell at record levels
German borrowing costs sank back towards all-time lows as protests in Hong Kong rattled stock markets and reports of an oil tanker attack in the Gulf of Oman fuelled risk aversion elsewhere. Image Credit: PxHere

Sales of debt from Italy, Spain and Portugal have drawn strong investor demand despite the record low yields they offered and some expectation that the European Union will discipline Italy over its excessive debt. With eurozone bond yields offering ultra-low or negative returns, the carry trade is on, analysts say, meaning that each of the three peripheral bond issuers was met with strong demand in Wednesday's sales.

The term "carry" refers to a trade where investors take advantage of low short-dated borrowing costs to pick up some yield by buying longer-dated debt. Worries about economic growth as well as trade disputes are cutting core eurozone yields to multi-year or all-time lows

German borrowing costs sank back towards all-time lows as protests in Hong Kong rattled stock markets and reports of an oil tanker attack in the Gulf of Oman fuelled risk aversion elsewhere. German's benchmark bond yield was last down more than one basis point to -0.25%. French 10-year yields were two basis points lower. But overall, bond spreads are tightening, suggesting a hunt for yield is benefiting the periphery.

"Usually you would expect spreads to widen, but carry is so low in the core ... which is why the periphery is doing so well," said Daniel Lenz, rates strategist at DZ Bank. A further test will come later on Thursday as Italy looks to auction up to 6.5 billion euros of government bonds, or BTPs. Italian bond yields were mostly flat before the sale, with Italy's' 10-year last at 2.42 %.

A Eurogroup meeting on Thursday is expected to take up Italy's heavy public debt. European Economics Commissioner Pierre Moscovici said on Wednesday Italy should present a credible fiscal path for this year and next if it wants to avoid European Union disciplinary action over its debt. Also on Wednesday, Italian Economy Minister Giovanni Tria said the country must reduce its "enormous" public debt to shore up market confidence.

Investors were undeterred, though, placing orders of more than 23.5 billion euros for a 20-year syndicated bond. Spain raised 6 billion euros via syndication of 10-year debt at a yield of 0.629%, or 33 basis points over mid-swaps, from an order book of 27.5 billion euros.

Portugal auctioned 1.25 billion euros of 10- and 15-year bonds on Wednesday at a record low yield. State debt agency IGCP said the allotment yield on the benchmark June 2029 maturity fell to 0.639%, below 1.059% at an auction in May, and the first time Portugal has sold 10-year debt below 1%.


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