EURO GOVT-Top-rated bond yields rise as new debt floods market

Wed Apr 10, 2013 7:00am EDT

Related Topics

* German bond sale solid, Austria launches new benchmarks

* Austrian, French and other top-rated bonds pressured

* Rate cut speculation supports German Schatz auction

By William James

LONDON, April 10 (Reuters) - Yields on highly-rated euro zone bonds lifted further from recent lows on Wednesday, with prices seen slipping in the near term, as investor demand focused on a wave of newly-issued debt.

A broad sell-off across the euro zone's more secure countries extended into a second day as the surge in demand that followed Japan's announcement of huge monetary stimulus paused, and the flow of new debt into the market gathered pace.

French, Dutch, Belgian and Austrian bond yields all rose away from the record lows hit in the wake of Japan's $1.4 trillion bond-buying stimulus plan.

"It feels like this euphoria about Japanese buying that was sweeping the markets has cooled down a bit, in combination with quite a decent chunk of supply hitting the market," said Michael Leister, senior strategist at Commerzbank in London.

Germany sold 4.22 billion euros of two-year debt and Austria launched new 10- and 20-year bonds via syndication, adding to 14 billion euros issued on Tuesday by the Netherlands, Finland and the euro zone's EFSF rescue fund.

The supply helped to mop up demand created by expectations that Asian investors will switch away from low-yielding Japanese bonds in search of higher returns.

Ten-year Japanese government bonds last yielded around 0.62 percent compared with 1.3 percent on benchmark German bonds, the lowest yielding equivalent debt in the euro zone.

Analysts said further rallies would need to be backed up by evidence of Japanese investors swapping into euro zone debt.

"There's been lots of anticipation priced in but we should not forget that these asset managers and investors don't just pull a switch overnight. It seems like there's more to come but we have to wait until we get some data," Leister said.

French 10-year yields were 7 basis points higher on the day at 1.86 percent, some way above the record low of 1.71 percent touched on Monday. Dutch, Belgian and Austrian yields all rose by a similar amount.

BUNDS SLIP

The German Bund future, sought as a safe haven in times of market stress, was down 41 ticks on the day at 145.39, having backed away this week from 10-month highs reached on Friday.

Despite the dip in German prices, a sale of two-year Schatz bonds found solid demand, with some investors anticipating a possible euro zone interest rate cut in the coming months to tackle the region's economic decay.

"There are mounting expectations that the ECB will cut rates or do something that can affect short-term yields," ING rate strategist Alessandro Giansanti said.

"The market believes yields will stay near zero for a long period of time or even turn negative so there is buying interest in the Schatz at the moment."

European Central Bank executive board member Joerg Asmussen said on Tuesday there were more downside risks to a euro zone recovery in the second half of 2013 than there were one or two months ago - comments that some saw as reinforcing expectations of a rate cut.

Analysts pointed to the large amount of money being returned to investors this week in interest payments and maturing German bonds as a supportive factor for the sale.

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