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UPDATE 1-Euro zone bond focus turns to supply after sharp sell-off

Wed, 26th Aug 2020 11:25

* Euro zone periphery govt bond yields http://tmsnrt.rs/2ii2Bqr
(Adds details, comment)

By Yoruk Bahceli

AMSTERDAM, Aug 26 (Reuters) - Euro zone bond markets turned
their focus to a pick-up in supply on Wednesday, with yields
continuing to inch up after a hefty sell-off a day earlier saw
key assets suffer their biggest daily losses since May.

Market levels stabilized after both safe-haven German
government bond yields and those of their riskier Italian peers
saw their biggest daily jumps in nearly four months on Tuesday,
with a boost to risk appetite from German data and news on
U.S.-China relations denting appetite for fixed income.

Analysts also said the anticipated pick-up in European bond
issuance after the summer lull had put pressure on bond markets,
where borrowing costs tend to rise ahead of sales as investors
make room for the new debt.

Focus was turning to issuance as Finland gathered more than
27 billion euros ($31.9 billion) of demand for a 3 billion euro
sale of 10-year bonds, according to a lead manager message seen
by Reuters.

Finland's is the first syndicated sale from a euro zone
government since late July. In syndications borrowers hire banks
to sell the debt directly to end investors, allowing them to
sell larger volumes and tap a wider investor base. Governments
are using them to sell debt much more frequently than in the
past, as they ramp up borrowing to fund coronavirus stimulus
measures.

In Wednesday's auctions, the more common way governments
raise debt, Germany sold 2.99 billion euros of 15-year bonds,
receiving demand 1.5 times the amount sold, while Portugal sold
1.25 billion euros of seven- and 10-year bonds.

Richard McGuire, Rabobank's head of rates strategy, said he
sees demand for debt sales "remaining very supportive on low-
growth, second-wave risks, social unrest, geopolitical tensions
and even a possible political crisis come the U.S. election
should Trump attempt to ignore a defeat.

"We will of course be looking at the upcoming slug of
issuance as part of an ongoing (reality) check regarding this
favourable demand outlook," McGuire said of recent debt sales.

Germany's 10-year bond yield rose another 2 basis points to
-0.40%, a 1-1/2 week high, a subdued move after a 7 bps rise on
Tuesday. Italy's 10-year yield was unchanged at
1.09%, near a three-week high.

"With (Bund) yields back closer to the upper end of their
recent ranges, however, the selling pressure looks set to
subside and we turn less defensive again," Commerzbank's head of
rates and credit research Christoph Rieger told clients.

The euro zone economy is growing in line with the path the
European Central Bank projected in June and the bank's pandemic
bond purchase scheme is working as intended, policymaker Peter
Kazimir said.

($1 = 0.8464 euros)
(Reporting by Yoruk Bahceli
Editing by Toby Chopra and David Holmes)

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