European governments take advantage of fall in borrowing costs ahead of ECB meeting

3 minutes

Following the astute Italy as governments seek funding before ECB?

Euro area yields continue to fall as the dovish ECB of the Euro area has priced down.

June 9 - Southern European governments are taking advantage of a fall in borrowing costs to raise funds ahead of a closely watched European Central Bank meeting with Italy following Greece in selling out of debt on Wednesday.

The Euro zone bond yields have fallen sharply in recent weeks, with dovish commentary of ECB officials helping investors to bet the bank is unlikely to slow its pandemic emergency bond purchases at its policy meeting on Thursday.

This week has helped countries most vulnerable to a stiffening of those purchases in order to raise the cost of legality in the market, to strong demand.

Greece, the most indebted country of the bloc, received 29 billion euros of demand for the re-opening of a 10 year bond that will raise 2.5 billion euros on Wednesday said its debt management agency.

This follows a sale by Italy, which on Tuesday raised 10 billion euro from a 10-year syndicated bond, and was received of demand of 65 billion euros.

Investors easily absorbed the supply, with euro zone bond yields that can move inversely with prices. They maintain lows on early May and continue to fall on Wednesday as investors before the ECB.

Yields fell as part of a broader government bond rally that saw American Treasuries rallying also.

Market participants are in the camp that most of what is expected from the ECB is already in prices and therefore it's a good entry point, said Benjamin Moulle, head of the sovereign, supranational and agency syndicate at Credit Agricole CIB, a lead manager on Italy's Tuesday sale.

On Wednesday, the 10-year yield fell by over 5 basis points to 0.81%, pushing the closely watched gap with the benchmark German yield to 105bps, the lowest since May 5 at.

We have evidence that a lot of clients were internally motivated to stand within the BTPs in relatively underweight and a lot of them were in particular international accounts highly motivated to see a new syndication from Italy coming before the ECB, said Moulle.

Greek yields retraced much of a rise from Tuesday as the deal was announced first.

Issuers are also keen to get their deals done before the European Union starts selling bonds to finance its coronavirus recovery fund, most likely starting next week.

In auctions, the more common way government raise debt. Germany raised 1.26 billion euro from the reopening of a 30-year bond, which saw similar demand as that of the previous German auctions in contrast to recent bonds.

Portugal raised 1 billion euros from six and 10-year bonds and paid a lower yield than at the previous auction of bonds.

Germany’s 10-year yield, the benchmark for the bloc, was down 3 basis points to 0.25%.

On Wednesday, some Mizuho analysts said to clients that the markets were likely to de-risk ahead of the ECB meeting, and not support longer-dated bonds for the time being. What are some examples:

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