Resilient euro zone bond market easily absorbs supply
LONDON Oct 9 (Reuters) - Euro zone debt markets easily absorbed a bout of supply on Wednesday as investors, worried about the implications of budget deadlock in the United States, snapped up assets denominated in euros.
Five-year German bonds outperformed in the secondary market after a Bobl note sale drew solid demand, attracting 2 times the amount on offer, up from 1.5 at a similar sale in September despite the lower returns on offer.
Interest in a syndicated sale of 31-year Spanish bonds and a syndication of 7-year Italian debt was solid, adding to signs of improved sentiment towards the euro zone's debt-ridden southern economies.
"People are tending to be somewhat long of euros at the moment... Demand for the euro is underpinned by the fact that it's not dollars (as people) worry about this event risk," Marc Ostwald, strategist at Monument Securities said.
But he added: "In most people's mind, (the U.S. impasse) is still going to resolve itself even though they feel a little bit unsettled by the fact that it hasn't been resolved so far."
Bund futures rose 26 ticks to 140.48, pushing 10-year German yields 1.9 basis points lower to 1.79 percent. Five-year bonds outperformed, with yields 3.3 bps lower at 0.68 percent.
Ten-year Italian yields were flat at 4.35 percent as Italy looked set to raise 5 billion euros at the 7-year sale, IFR, a Thomson Reuters news and financial information service, reported.
Interest in a syndicated 31-year debt Spanish debt sale topped 10 billion euros, according to IFR, citing a bank managing the deal.
U.S. DEFAULT RISK
The cost of insuring one-year U.S. government debt against default hit its highest since July 2011 and one-year CDS is now trading 22 bps above five-year rates - a classic sign of stress and reflecting investor concern about a default.
In normal circumstances, it is costlier to buy longer-term credit protection and yields on longer-dated debt are usually higher than on bonds maturing in the near future.
The U.S. fiscal stand-off has become increasingly entrenched, but markets were still hopeful of a resolution.
President Barack Obama said on Tuesday he would be willing to negotiate only after Republicans agree to re-open government and raise the debt limit unconditionally.
So far, markets have largely weathered this deadlock on the view that the Fed will delay any plans to scale back bond-purchases - reinforced by Obama's planned nomination of Janet Yellen to head the U.S. central bank.
But if fears of a U.S. default grow, euro zone debt stands to benefit, analysts said.
"With this discussion about the debt ceiling and bear in mind the very small probability that you may have a potentially disruptive market event, like some minor default probability in the U.S.... it would leave actually Bunds and generally European debt as the only alternative for G10 investors," Alessandro Tentori, global head of rate strategy at Citi.
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