January 28, 2011

Euro-Zone Primary Bond Market Calmer Ahead Of Spain, Portugal Auctions! DEEPER In Debt!

The Wall Street Journal
written by Emese Bartha, Dow Jones Newswire
Friday January 28, 2011 at 5:59am ET

FRANKFURT (Dow Jones)--The euro-zone's sovereign primary market may be becoming a friendlier environment for fiscally frail or indebted countries, at least for now, with the market calmer ahead of government debt auctions in Portugal and Spain next week.

Asian investors seem to be active on the buy side at various debt auctions of the euro zone's weaker issuers, while the pressure on politicians is huge to combat the debt crisis effectively.

"The buying of government bonds by China and/or Japan is likely to stabilize spreads in the short term and therefore buy politicians some time to find effective mechanisms to combat the sovereign debt crisis," said DZ Bank analysts in a note. There are early indications at present that suggest it will be possible to strengthen the demand for euro sovereign bonds, and also that a political solution will be found, they said. However, former Chinese central bank adviser Yu Yongding said Friday he wouldn't support buying bonds from countries like Greece and Spain and that China should instead consider buying bonds from agencies backed by the European Union, such as the European Financial Stability Facility, or EFSF.

The EUR5 billion debut bond issue of the EFSF earlier this week has been a blockbuster with an order book in excess of EUR40 billion, signaling investors' trust in the euro zone's future and a thirst for top-rated paper.

While the scene is more benign for the euro zone's periphery than in December, the debt crisis is far from over, and UniCredit Bank's Milan-based strategist Elia Lattuga said market volatility should keep the debt of core countries well bid. But Lattuga said although all are rated AAA, Germany, France, Austria, Finland and the Netherlands have different strong points. Finland ranks best when looking at fundamentals, while French fundamentals do not speak in favor of their long-term government bonds, OATs.

"We think Austria offers the best opportunity. Finland and the Netherlands offer only a very small pick-up relative to Germany," he said, adding that France is trading at relatively wide spreads compared to Germany, the euro zone benchmark, but also has weaker fundamentals.

Two of the euro zone's elite group will sell bonds next week. Austria will auction EUR1.65 billion of the 3.20% February 2017 and 4.15% March 2037-dated bonds, while France will auction EUR7.5 billion to EUR8.5 billion of long-term government bonds, or OATs, maturing in 2016, 2020, 2021 and 2023.

Portugal, which insists it doesn't need external help to get through the crisis, will auction EUR1 billion to EUR1.25 billion of six- and 12-month Treasury bills Wednesday. Spain will follow Thursday with the sale of the 2.50% October 2013 bond for an amount to be announced Monday.

Looking ahead to February, analysts at Credit Agricole CIB forecast EUR77 billion of bond supply in the euro zone, easing from "a usually hectic January," with EUR24 billion in redemptions and EUR12 billion in coupon payments only partially offsetting that. The lack of redemptions from euro zone peripheral issuers other than Italy next month "at least takes away potential liquidity concerns for those peripheral issuers," they said, also pointing to the fact that there are no peripheral bonds being redeemed until April.

"The extent of this supply risk [in February] should largely be determined by what announcements are made by EU politicians on rescue efforts," they said.

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