Low-rated euro zone bond yields rise after flood of supply

Thu Jan 23, 2014 12:46pm EST

Related Topics

* Irish, Portuguese, Italian bond yields rise

* Spanish yields off 8-yr low

* Investors are already long in Spain, Italy - Citi

By Emelia Sithole-Matarise and Marius Zaharia

LONDON, Jan 23 (Reuters) - Lower-rated euro zone bond yields rebounded from multi-year lows on Thursday as investors sold on some of the peripheral paper they have been flooded with since the start of the year.

Data showing weaker U.S. factory growth and a report suggesting a slowing in Chinese manufacturing soured demand for higher risk assets, prompting some profit-taking in peripheral euro zone debt and lifting safe-haven German bonds.

Large amounts of supply hitting the market have left some investors holding more paper from peripheral euro zone countries than they want or are allowed to keep by their risk managers, prompting some offloading of the bonds, traders said.

In the latest sale of bonds from the bloc's more vulnerable economies, Spain issued 10 billion euros ($13.6 billion) of a new 10-year bond on Wednesday, drawing demand of almost 40 billion - a record for European governments.

Helped by an improving euro zone growth outlook, Madrid has sold larger-than-expected amounts of bonds every week since the start of the year, completing 16.6 percent of this year's 133.3 billion euros funding target already.

This follows strong sales in Ireland, Portugal and Italy, with Rome due to sell bonds next week as well.

While signs of recovery in these economies have reassured investors that government finances will improve, yields rose on Thursday despite forecast-beating euro zone business surveys.

"It's logical that there might be some accounts taking a bit of risk off the table after the big amounts of supply delivered to the market especially after the 10 billion euros of supply from Spain," said Gianluca Ziglio, head of fixed income research at Sunrise Brokers.

Portuguese 10-year yields jumped 10 basis points to 5.015 percent while equivalent Italian yields rose 3 bps to 3.86 percent and Spanish yields were 2 bps up at 3.76 percent, retreating a little further from recent eight-year lows.

Irish 10-year yields were 1 basis point higher at 3.30 percent, having hit record lows this week.

"This isn't necessarily to say the rally is over but most likely signifies that after the strong run we have seen the market is pausing for breath," said Investec chief economist Philip Shaw.

German 10-year Bund yields, the euro zone benchmark were down 5 basis points at 2.61 percent, tracking gains in U.S. Treasuries after a report on factory activity in the United States cooled bets the Federal Reserve would accelerate its pace of trimming its bond purchase stimulus.

Ziglio also said relatively lighter debt sales from Germany against big coupon and bond redemptions supported Bunds.

LONG POSITION

Others say the large amounts of bonds hitting the market from the periphery may prompt a pause in this year's strong rally in lower-rated bonds, especially given that the amount of debt to be sold exceeds scheduled repayments in February.

"People are fairly long of this stuff (peripheral bonds) so there might be some supply indigestion," one trader said.

A "long" position is in effect a bet on further price rises. A "short" is a bet in the opposite direction.

Using global flows data, analysts at Citi have come up with a seven-notch scale of how investors are positioned in certain markets, ranging from "very short" to "very long".

They said hedge funds globally and U.S. "real money" investors were "very long" Spanish bonds, while domestic investors and those based in the euro zone and British were "long". Central banks were "small long", while Japanese investors were "small short".

"Real money" is market jargon for long-term investors, usually pension funds and insurers.

In the Italian bond market, hedge funds and real money investors in the euro zone and Britain were "long", while U.S. real money investors were "short". In general investors in Ireland were less long than in Spain and Italy, Citi said.

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