January 8, 2019 / 11:29 AM / 6 months ago

UPDATE 2-Supply avalanche keeps upward pressure on euro zone bond yields

* Euro zone bond yields higher

* 35 billion euros of new govt bond supply expected this week

* Austria, Netherlands, Germany auction bonds

* German industrial output falls (Updates with Irish, Italy deals, adds quote, updates prices)

By Virginia Furness

LONDON, Jan 8 (Reuters) - Anticipation of 35 billion euros ($40 billion) of new government debt issuance this week kept upward pressure on euro zone bond yields on Tuesday, overshadowing more weak data from Germany and a decline in euro zone economic sentiment.

Austria, Germany and the Netherlands held auctions on Tuesday. Ireland’s debt agency said it had hired a syndicate of banks and brokers to sell a new 10-year bond and sources told Reuters that Italy is preparing a 15-year bond sale.

Portugal is expected to add to recent syndications from Belgium and Slovenia.

Euro zone bond yields rose as the new supply outweighed downward pressure from falling German industrial output.

“What is more important than the tier two macro data is the avalanche of supply in European government bonds and SSA (supranational, sub-sovereign and agency), as well as the U.S. refinancing which starts today,” said Christoph Rieger, rates strategist at Commerzbank.

German industrial output unexpectedly fell in November for a third consecutive month, data showed on Tuesday, in a further sign that Europe’s largest economy shifted into a lower gear in the final quarter of 2018.

The data raised concerns that Germany slipped into a technical recession in the fourth quarter.

Euro zone economic sentiment deteriorated markedly and by more than expected in December, European Commission data also showed on Tuesday.

Further signs of weakness in the euro zone economy weighed on the market’s long-term euro zone inflation expectations, with the five-year, five-year forward, falling to its lowest since June 2017 just below 1.54 percent.

Germany’s 10-year government bond yield rose three basis points to 0.247 percent, its highest level since Dec. 31 , before easing back to 0.23 percent.

Ten-year bond yields from other higher-rated euro zone states were also 1-2 two bps higher .


Austria sold 600 million euros of bonds maturing in 2028 and 500 million of 2047 government bonds, while the Netherlands raised 1.55 billion euros from bonds maturing in 2023 and Germany sold 398 million euros of its 2030 bund on Tuesday.

Analysts expect supply for the first full week of 2019 to surpass that of the same week last year.

While low bond yields should result in lower all-in funding costs for these issuers, the glut of supply is expected to mean that new issue concessions - the extra premium governments must offer to entice investors to buy new debt - could creep up.

Italian bond yields extended gains after the news on a potential new syndicated bond deal, and 10-year yields hit a three-week high at 2.986 percent.

Italy last completed a syndicated deal in January last year when it sold a 20-year nominal bond before a populist government came to power sapping appetite for Italian bonds.

“Since the budget was revised there has been appetite for (Italian) BTPs and that should continue,” said Pooja Kumra, European rates strategist at TD Securities in London.

“In terms of what is being announced by European sovereigns this week, it is in line with expectations and reflects the better sentiment towards bond markets.” ($1 = 0.8740 euros)

Additional reporting by Abhinav Ramnarayan, Sujata Rao and Dhara Ranasinghe; Editing by Kirsten Donovan and Susan Fenton

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