EURO GOVT-Top-rated bonds extend selloff on new debt influx

Wed Apr 10, 2013 12:12pm 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

* Split Fed stance on QE kicks German Bunds lower

By Emelia Sithole-Matarise and William James

LONDON, April 10 (Reuters) - A broad sell-off among highly-rated euro zone bonds extended into a second day on Wednesday, lifting their yields from recent lows as investor demand focused on a wave of newly-issued debt.

French, Dutch, Belgian and Austrian bond prices were seen slipping further in the near term, with investors looking for evidence of a switch out of low-yielding Japanese bonds into the currency bloc after Japan's huge $1.4 trillion stimulus plans last week spurred demand for overseas debt.

Yields lifted further from the record lows hit in the wake of Japan's plan and as the market absorbed more than 20 billion euros in newly-issued bonds this week.

"We're seeing a pullback on the combination of issuance and the market starting to question when and how much of this JGB-related money is going to find its way into the euro zone," said Lyn Graham-Taylor, a strategist at Rabobank.

"Until we get hard evidence of Japanese money flowing in it might become a less significant driver for the market for a few days."

Germany sold 4.22 billion euros of two-year debt and Austria issued 4.5 billion euros of 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.

French 10-year yields were 7 basis points higher on the day at 1.86 percent, off Monday's record low of 1.71 percent. Belgian and Austrian yields rose 8 bps to 2.10 and 1.66 percent respectively.

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 depend on how much cash flows from Japanese investors swapping into euro zone debt.

"If this fresh buying comes in it's not going to be a huge wave, it will be coming in gradually so I don't think we're going to test those lows again," said David Keeble, global head of fixed income strategy at Credit Agricole.

BUNDS SLIP

The German Bund future settled 45 ticks lower at 145.35. It slightly extended falls and a retreat from 10-month highs reached on Friday, after the U.S. Federal Reserve's minutes to its March policy meeting raised concerns the central bank might taper or end its bond purchases by the end of the year.

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."

Analysts also said the large amount of money being returned to investors this week in interest payments and maturing German bonds supported the sale.

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