Italy, Spain yields edge up ahead of bond sales

LONDON, July 7 Mon Jul 7, 2014 4:35am EDT

LONDON, July 7 (Reuters) - Italian and Spanish bond yields nudged higher on Monday ahead of a slew of debt sales this week, but underlying sentiment in the lower-rated euro zone bonds remained firm thanks to a dovish European Central Bank.

Adding to traders' relative caution was a newspaper report that said global banking regulators were considering ending the long-standing treatment of all government bonds as potentially risk-free.

The euro zone bond market, which rallied sharply last week after the ECB said it could print money to support the region's economy, paused for breath ahead of debt sales due in Italy, Ireland, Germany, Austria, the Netherlands and possibly Greece.

The sales are widely expected to go smoothly, with demand especially strong for peripheral bonds which still offer relatively higher yields than core debt.

"There's a little more supply this week from European treasuries so many investors may try to take the opportunity before the summer break to buy into primary auctions to get higher yields offered by the periphery," said Felix Hermann, a market strategist at DZ Bank.

"I doubt we will see a lot of (price) concession. We also have lots of coupon payments coming up and the talk from ECB officials this week should support the environment for euro zone govvies (government bonds) in general."

Italian 10-year yields were up 2 basis points at 2.71 percent. The Italian Treasury will give details later on Monday on the maturities and size of bonds it plans to sell later in the week. Spanish equivalents rose by a similar amount to 2.68 percent.

GREEK OFFER

Some in the market expect Greece to sell a new three-year bond this week, its first after it successfully returned to debt markets in April with a five-year bond issue. Athens told Reuters last month it planned to issue a seven- or three-year bond before August. Greek 10-year yields were 1.5 bps higher at 5.95 percent.

The rest of the euro zone bond market held broadly steady following last week's sharp rally after the ECB said banks could borrow as much as 1 trillion euros in cheap four-year loans that will be offered in September and December.

Some market participants were also mulling the potential impact of a Wall Street Journal report saying global banking regulators were considering new measures that would make it harder for banks to understate the riskiness of their assets. This included potentially ending the long-standing treatment of all government bonds as risk-free, the newspaper said, citing people familiar with the discussions.

Given that domestic banks are major buyers of government bonds in many countries, especially in the weaker economies, big changes to the risk weighting of the bonds could jolt the market, analysts said.

Nordea strategists said that, while such a major shift was unlikely, "even more modest changes would put some upside pressure on the bond yields of the riskier countries". (Editing by Gareth Jones)

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