June 13, 2019 / 7:40 AM / 4 days ago

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

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

By Virginia Furness

LONDON, June 13 (Reuters) - A firesale of peripheral debt from Italy, Spain and Portugal has drawn strong investor demand despite the record low yields on offer, and some expectation that the EU will discipline Italy over its excessive debt.

With euro zone bond yields offering ultra-low or negative returns, the carry trade is on, analysts say, meaning that each of the three peripheral bond issuers were 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 seeing core euro zone bond yields hit multi-year or all-time lows, but spreads are also tightening, suggesting there is a hunt for yield which 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.

Italy is expected to be a key focus at this month’s Eurogroup meeting on Thursday, analysts said, amid concerns over its heavy public debt load.

European Economics Commissioner Pierre Moscovici said on Wednesday Italy should present a credible fiscal path for this year and next if it still wants to avoid European Union disciplinary action over its debt.

Also on Wednesday, Italy’s Economy Minister Giovanni Tria said the country must reduce its “enormous” public debt to shore up market confidence.

However, investors were undeterred by such concerns, placing orders of more than 23.5 billion euros for a 20-year syndicated bond.

A further test will come later on Thursday as the sovereign looks to sell up to 6.5 billion euros of government bonds or BTPs at auction.

Spain raised 6 billion euros of 10-year debt via syndication at a yield of 0.629%, or 33 basis points over mid-swaps

Portugal sold 1.25 billion euros of 10- and 15-year bonds in an auction 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%, way below 1.059% at the previous auction in May, and the first time Portugal has sold 10 year debt below 1%. (Reporting by Virginia Furness Editing by Gareth Jones)

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