July 18, 2018 / 7:59 AM / 2 months ago

German 10s/30s yield spread at tightest in five weeks ahead of auction

* German 10s/30s spread at tightest in over five weeks

* Analysts to gauge demand at German 30-year bond auction

* Italian 10-year bonds reverse losses since late May

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

By Abhinav Ramnarayan

LONDON, July 18 (Reuters) - The premium investors demand to hold Germany’s long-dated bonds over benchmark 10-year debt was at its lowest level in over five weeks, pushed lower by bets on ECB action and concerns over long-term growth in Europe and beyond.

A scheduled 1 billion euro auction of 30-year bonds from the German debt agency later on Wednesday will further test appetite for long-dated debt, but the evidence of the Bund yield curve in recent weeks suggests it could be strong.

The gap between German 10- and 30-year bond yields was at its narrowest in over five weeks at 67 basis points, though this was pushed flatter by a recent change in the German 10-year benchmark from the February 2028 to the August 2028 Bund.

“Over the past few weeks, ECB policy expectations have been a bullish driver for euro area bonds in general and also for the German Bund yield curve,” said Commerzbank rates strategist Rainer Guntermann.

He was referring to source-based stories suggesting that the European Central Bank will use redemptions from its bonds holdings to buy longer-dated government debt even after its bond-buying scheme closes at the end of 2018.

“Also there is a bit of uncertainty over global growth which is compressing German 10-year yields, and the hunt for yield then sees demand spill over to other debt,” he added.

Longer-dated debt benefits from this hunt for yield, as does lower-rated government debt such as that of France and Belgium and also “peripheral” Southern European countries, he said.

And indeed, with German 10-year yields remaining persistently low — it was at 0.35 percent on Thursday, less than half its yearly peak of about 0.81 percent — other euro zone debt has benefited.

The France and Belgium 10-year bond yield spread over Germany are both at at their lowest since late May at 28-29 bps.

Meanwhile, Italy is now close to wiping out all of the losses since a May 29 selloff, when its short-dated debt suffered its worst day in over 25 years.

Italian 10-year yields dipped to 2.46 percent in early trade on Wednesday, its lowest since May 28.

The closely-watched Italy/Germany 10-year bond yield spread is also close to its tightest since that day at 211 bps.

Analysts said this was mostly to do with a hunt for yield and a persistent carry trade, a term described a trading strategy where some investors borrow money at low rates to invest in assets with a higher yield.

“Nothing changed in the political situation - in autumn, when the arguments come back and the government begins its work we could see another situation,” said DZ Bank analyst Sebastian Fellechner.

Short-dated Italian yields, however, spiked 5 basis points to a day’s high of 0.62 percent on Wednesday morning after clearing house LCH raised its margin call on Italian bonds.

Reporting by Abhinav Ramnarayan; Editing by Toby Chopra

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