Euro Debt Supply : Spain hogs supply limelight again

 

After a successful start to its tough 2013 funding programme, Spain's auction next week will be scrutinized to see whether it can keep up the momentum and avoid a sovereign bailout this year.

Spain will sell bonds maturing in 2015 and 2018 but will also tap a long-dated one maturing in 2041, even though it is expected to skew issuance towards the shorter-dated ones that are within the scope of possible central bank support.

The sale will benefit from investors keen on higher-yielding assets, but analysts say the Treasury is still playing it safe, steering clear, for now, from a new 10-year bond which would show confidence and plug a gap in the sovereign's yield curve.

"The Spanish one is more of a test. I assume it is going to be again heavily skewed to short dates," Marc Ostwald, strategist, at Monument Securities said.

Spain raised €5.8 billion, selling above its target range at lower borrowing costs on Thursday. It faces a sizeable €121 billion funding target for the year - a 7.6% increase on the amount it raised in 2012 - but Spanish borrowing costs have fallen sharply since the ECB President Mario Draghi promised to buy bonds of struggling countries that seek help, making the task easier.

Artis Frankovics, strategist at Nomura, also predicted that the issuance would be concentrated on short-dated bonds, with the 2041 bond an opportunity to test demand for long maturities.

As it tries to front-load issuance, in the same way it did last year, the ease with which Madrid manages to raise funds in the first 2 months of 2013 will serve as a presager for the rest of the year, analysts said.

"Given that we feel that a lot of investors have already bought into Spanish bonds, we don't think now is the right time to be increasing our holdings," said Martin Harvey, fund manager at Threadneedle Investments, which manages €96 billion in assets and whose European bond funds are benchmarked against the Merrill Lynch pan-European large cap index.

Spanish bonds make up 5% of the index and Threadneedle's European Bond funds were underweight the index with only 2% of their holdings in Spanish government bonds and all short-dated.

"If by February we get through that supply without any problems then we would be more comfortable," Harvey added.

"CORE" DEMAND

Demand for so-called peripheral bonds has remained strong, but debt issued by higher-rated countries has also benefited from ample liquidity in the market at the start of the year.

This should make for a favorable backdrop to a sale of German and French debt next week.

Germany will sell €5 billion of 10-year bonds on Wednesday and analysts expect that, like the 5-year Bobl this week, the sale would benefit from a recent rise in yields which have made returns on those bonds slightly more enticing.

In the secondary market, ten-year German bonds currently yielded 1.59%, up from a low of 1.26% in December.

"We have high redemption next week in core space and also... the pick-up this new bond will have over the current benchmarks should attract decent demand," Michael Leister, senior interest rate strategist, at Commerzbank said.

Despite the rise in German borrowing costs, French debt still offers an attractive pick-up relative to its safe-haven counterpart. That would likely favor the €7 to €8 billion sale of French debt maturing in 2015, 2017 and 2018, analysts said.