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- Daily brief -Tuesday 27 September 2016
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Euro zone debt tensions ease as peripherals tap mkts
Ireland sold 1.5 billion euros in bonds on Tuesday, weathering a ratings cut by Moody's, and Spain and Greece found buyers for shorter-term paper, adding to evidence of a recovery in demand for peripheral euro zone debt.
While premiums remained high, the trio of successful auctions showed concerns over a possible sovereign debt meltdown in the region are easing and suggested stress tests being published on Friday are expected to give Europe's top banks a reasonably clean bill of financial health.
Borrowing costs have risen sharply across the peripheral euro zone countries since the bloc's debt crisis took hold, and Greece and Ireland had to pay higher yields on Tuesday than in previous auctions. Yields on Spain's treasury bills fell, however.
"The key thing, as we saw last week with Spain, is that peripheral countries have no difficulty (raising) funding in markets" Oliver Mangan, chief bond economist at AIB Global Treasury in Dublin, said.
Spain, which halted a punishing run in the debt market last week by selling 3 billion euros of 15-year government bonds, had little problems getting 5.97 billion euros of 12- and 18-month Treasury bills away, hitting the top end of its range.
Debt sales in Greece, Portugal and Italy also got solid responses from investors last week.
Economy Minister Elena Salgado said the successful auctions showed signs of confidence returning to markets ahead of Friday's stress tests.
Europe is testing how 91 banks across 20 countries would cope with another economic downturn and losses on sovereign debt holdings, in an effort to restore confidence after the Greek crisis hit markets and sparked fears the euro zone could unravel.
With sources indicating that Germany's largest listed banks were on track to pass the tests, analysts said a positive outcome on Friday would provide some relief for the borrowing needs of peripheral euro zone members.
"There's such a strong rumour going around that the results are going to be reasonably positive, (hence) the assumption would be that peripheral spreads will come in" Alan McQuaid, chief economist at Bloxhm Stockbrokers in Dublin said.
"(But) you always get a knee jerk reaction with these things and there might be a different reaction down the line."
IRELAND FULLY FUNDED
Unlike Greece, Ireland does not face any major debt redemptions this year and Tuesday's strongly bid auctions of 2016 and 2020 bonds ensured it covered its funding needs into the second quarter of 2011, its debt agency said. With 90 percent of its planned 20 billion euro of borrowings this year completed, Dublin is also well positioned to prefund for next year and has said it wants to have the 5 billion euro in debt maturing next year already funded going into 2011.
The average yield on the 2020 bond rose to 5.537 percent from the 4.688 percent from the last comparable auction in April, reflecting comments last week by Ireland's debt chief that the spread of Irish bonds over German Bunds was "disappointingly high".
Last month the economist who was one of the main advisers for Ireland's austerity measures said 10-year bond yields needed to be kept below 5 percent to allow Dublin to stabilise its borrowing.
The average yield for the 2016 bond fell slightly to 4.496 percent from 4.521 percent in June.
The spread of Irish 10-year bonds against their German equivalent was flat at 284 basis points after the auction while the 10-year Spanish/German yield narrowed a touch to 165 basis compared with 167 bps at Monday's settlement.
The average yield in the Spanish sale fell on the 12-month bill to 2.221 percent from 2.303 percent at the previous sale on June 15, and to 2.331 percent from 2.837 percent last time on the 18-month issue.
GREEKS PASS ANOTHER TEST
The equivalent Greek spread was at 793 bps from 796 bps at Monday's settlement after the country passed its second borrowing test since an EU/IMF funding deal in May, selling 1.95 billion euros of 13-week T-bills.
The auction to roll over maturing paper was covered, but Greece had to pay a yield of 4.05 percent, up from 3.65 percent in a previous April 20 auction. The bid-cover ratio was 3.85 versus 4.61 in the April sale.
The overwhelming majority of buyers in such auctions are usually domestic.
Greece's borrowing costs stayed below the 5.0 percent the debt-laden country pays to borrow under the 110 billion euro loan that the European Union and the International Monetary Fund put in place to calm a crisis that has shaken the euro zone.
"To see this auction coming in at just over 4 percent doesn't concern me either way. It's a solid auction and it shows they can operate a bill market" said Peter Chatwell, rate strategist at Credit Agricole CIB in London.
Portugal will look to sell 1.25 bln euros of 12-month T-bills on Wednesday and Germany will issue 4 billion euros of new 2042 bunds and 1 bln euros of 2020 inflation-linked bonds.
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