January 18, 2017 / 12:31 PM / 2 years ago

UPDATE 2-Euro zone bond yields rise as supply cranks up

* Belgium’s 6 bln euro 10-year bond sale pushes up yields

* Italy set to price 6 bln euro 15-year bond

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices for close)

By Abhinav Ramnarayan

LONDON, Jan 18 (Reuters) - Euro zone bond yields rose on Wednesday, a day after Belgium sold a record 6 billion euros worth of 10-year bonds and Italy was set to price the same amount of 15-year paper.

Investors tend to sell outstanding euro zone government bonds to make space for new supply, pushing yields higher. Some easing of Brexit-related concerns added impetus to the move.

“The size of the Belgium deal shows how the governments themselves view the way in which rates are going to go upwards in the future,” said DZ Bank strategist Daniel Lenz. “Therefore it is reasonable now to come up with large issuance sizes.”

The sale was Belgium’s largest via syndication, in which banks distribute bonds on behalf of the borrower to a range of investors.

Italy was also on course to sell 6 billion euros of a 15-year bond, having received more than 23 billion euros worth of demand.

This is even higher than the demand Belgium generated and is particularly encouraging for Italy, given that it lost its sole Single A rating last Friday after being downgraded by Canadian ratings agency DBRS.

Euro zone bond yields rose 3-4 basis points across the board on Wednesday, with Germany’s 10-year bond, the benchmark for the region, up 3 bps at 0.27 percent. Italian 10-year yields were up 2 bps to 1.92 percent.

The market calmed on Tuesday after UK Prime Minister Theresa May took the edge off Brexit-related jitters by saying the terms of Britain’s divorce from the European Union would be put to a parliamentary vote.

Euro zone yields had fallen sharply in the run-up to May’s speech when it became apparent she would signal a “hard Brexit” that will take Britain out of the EU single market, but they came off lows after her comments.

Supply has also been partly responsible for easing some of the pressure on short-dated bonds, which faced a severe squeeze at the end of 2016 due to a shortage of collateral.

Yields on Germany’s two-year bonds, or Schatz, rose 2 bps to minus 0.72 percent on Wednesday, well off their December 2016 record low of minus 0.836 percent.

“The short-end yields are moving to the upside as we expected as some of the ECB (stimulus) measures kick in, and also with some recent supply,” said Lenz.

The German Finance Agency, the federal government’s debt management office, sold 4.029 billion euros in a top-up of its 0.00 percent, 2-year notes, the Bundesbank said on Tuesday. (Reporting by Abhinav Ramnarayan; editing by Mark Heinrich)

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