Eurozone Government Supply Preview June 12th

BONDS

JGB’s again were the catalyst for early bond market moves over in Europe. Japanese government bonds fell as the moderate results of the Bank of Japan's bond-buying operation failed to offset disappointment over weak demand at its liquidity-enhancement auction.

Bunds are slowly recovering alongside peripheral debt markets, early on. Domestic accounts have been behind the Italy and Spain moves this morning.

The "bearish widening", with investors selling all euro-zone bonds, is unlikely to continue, says Commerzbank Bond analysts. An escalation of the crisis would see renewed interest in Bunds, whereas the periphery would benefit from a pick-up in the economy, the analyst went on to say.

In Europe, both Germany and Italy will be selling bonds in early European trading. Analysts expect demand to be firm – especially for the German Schatz.

Fixed income investors will also be focussed on the US later in the day, as it will aim to tap the market for $21bln of 10-year debt. Also in North America, Canada will be selling Ca$3.3bln of 2-year notes too.

ITALY AUCTION PREVIEW

Italy will aim to sell up to €7bln 12-month bills shortly after 10:00BST, and analysts at Societe Generale expect good overall demand for the offering.

Analysts expect domestic accounts to turn up for today’s offering.

For comparison, Italy also sold 12-month paper in May, raising €7bln at an average yield of 0.703%, covered at 1.16, and a yield tail 0.037; April, raising €8bln at an average yield of 0.922%, bid-to-cover at 1.64, and a yield tail 0.008; And again in April, it raised €7.75bln at an average yield of 1.280%, covered at 1.50, and a yield tail 0.011.

Italy was also due to auction around €3bln of 3-month bills today, however, the auction was cancelled due to Italy’s “lack of specific funding needs”.

GERMAN AUCTION PREVIEW

Shortly after the 10:30BST cut off time, the Germany treasury will reopen its 0% 2015 issue, for up to €5bln.

It is likely that this tap may see higher interest than previous Schatz auctions, due to the higher yields that are currently being offered: only a month ago, 2-year German paper was yielding a negative return; however, yields have edged up since then.

Supply pressures have weighed on bunds recently – perhaps due to the recent 10-year offerings from Germany and the UK. However, Germany will pay out €17.3bln from a maturing Schatz on Friday – this coincides with today’s offering, which some analysts consider a positive.

“The BKO June 2015 looks cheap versus longer maturities. Bund spreads look flat overall, in yield terms as well as versus swaps. We expect fair demand,” says Mary Beth Fisher, a fixed-income analyst at Societe Generale.

For comparison, the country last issued two-year paper in May, raising €4.229bln at an average yield of 0.02%, covered at 2.0. Prior to that, Germany did issue another Schatz – the €5bln 0.25% 2015 bond – in April, raising €5bln again, at an average yield of 0.02%, with bid-to-cover of 2.2. Over the last three 2-year auctions, the average cover ratio comes in at 1.8.

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