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Peripheral euro zone bond rally rides high on supply wave
March 12, 2015 / 5:31 PM / 3 years ago

Peripheral euro zone bond rally rides high on supply wave

* Investors hoover up 13 bln euros of bonds at auctions

* Markets undeterred by ECB buying ‘blackout’

* Spain 10-year yields fall below 1 percent

* Core bond yields off record lows on profit-taking (Updates prices, adds detail)

By John Geddie and Emelia Sithole-Matarise

LONDON, March 12 (Reuters) - A sharp rally in lower-rated euro zone bonds moved into its fourth day on Thursday, with central banks forging ahead with QE purchases and investors hoovering up a trio of new debt sales.

Core bonds lagged their peripheral euro zone peers as some investors booked profits after the start of the European Central Bank’s 60 billion euro-a-month securities buying programme kicked yields to record lows.

Spain, Italy and Ireland sold nearly 13 billion euros combined of new debt at record low yields, helping to ease fears about a scarcity of sovereign bonds as the ECB scheme gains pace.

Analysts said the auctions allowed investors to add to their stock of long-dated bonds which are expected to outperform as the ECB’s scheme further fuels a hunt for yield.

“A lot of people are playing the game of buying at the auction, and selling to the ECB later on,” said Piet Lammens, a strategist at KBC.

The ECB has set ‘blackout’ rules that prohibit it from buying newly issued debt or bonds of a similar maturity around the time of auctions, although the exact details remain vague.

This had not prevented investors positioning to make a quick profit from bonds bought in primary markets, analysts said.

Spanish 10-year yields fell below 1 percent for the first time after the auctions before bouncing back to trade at 1.09 percent, a touch lower on the day.

Italian equivalents fell 6 bps to 1.07 percent while Portuguese yields were down 4 bps at 1.58 percent.

In the 30-year sector, Italian and Spanish yields dropped as much as 16 bps to 1.81 and 1.79 percent , respectively.

GOING LONG

Yields on long-dated bonds are expected to fall faster than shorter-dated bonds under quantitative easing, as buying from central banks forces more investors to move out along the curve in search of returns.

“Buying 10- to 30-year bonds has been the top trade so far and I don’t think there is any reason for that to change,” said DZ Bank strategist Daniel Lenz.

The ECB bought 9.8 billion euros in assets in the first three days of its programme, with an average maturity of nine years, one of its top policymakers said on Thursday.

Spain sold 4.5 billion euros of bonds maturing in 2020, 2022 and 2025 on Thursday, while Italy sold 7.25 billion euros of 2018, 2022 and 2046 bonds, and Ireland tapped 1 billion euros of its 2045 bond for the first time.

The supply adds to the eligible stock of debt that can be purchased under the ECB’s programme, amid concerns that vanishing yields and a reluctance from some investors to sell could thwart the scheme.

Germany’s central bank may soon find there are not enough Bunds in the market for it to meet its share of European Central Bank sovereign bond purchases.

German 10-year yields, which set the benchmark for euro zone borrowing costs, were 5 bps higher at 0.25 percent as some investors took profits after the week’s rally. Yields on other core euro zone bonds were up 3-4 bps on the day, still within sight of their lows. (Editing by Catherine Evans)

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