Eurozone Bond Supply Worries Intensify

LONDON, Jan 7 (Reuters) – Higher-yielding euro zone bonds suffered on Friday as upcoming debt sales from the region’s peripheral states unsettled investors, though safe-haven gains for German debt were limited ahead of key U.S. jobs data.

Yield spreads against Bunds widened sharply for peripheral euro zone borrowers following Thursday’s announcement of a Portuguese bond sale. [ID:nLIS002542] Portugal, Spain and Italy are now all scheduled to hold their first bond auctions of the new year next week.

“With the euro zone’s three weakest issuers coming to market next week in the space of two days it ramps up the tension, said Orlando Green, strategist at Credit Agricole in London.

“There has to be some repricing to get (the auctions) done, but will it be enough? That depends on investor appetite.”

The Bund future FGBLc1 was 4 ticks lower at 125.69, erasing earlier gains as investors adjusted their positions in anticipation of a strong U.S. employment report. December’s non-farm payrolls data is due for release at 1330 GMT.

Greece and then Ireland were frozen out of debt markets and forced to seek bailouts from the European Union/IMF in 2010 as a result of large budget deficits and banking sector weakness.

Consequently, debt supply from other struggling euro zone states is set to be a key driver of sentiment in the coming months, with Portugal seen as the next most likely to seek aid.

“It’s pretty concerning the way the periphery is trading at the moment, and we haven’t even started supply yet… with Spain and Italy also selling (next week) it’s going to be pretty difficult times,” a trader said.

Ten-year yield spreads against the German benchmark were wider across the region. The Portuguese/German PT10YT=TWEB spread was last at 438 basis points, out 18 bps on the day.

Portuguese debt has underperformed Italian bonds IT10YT=TWEB — considered the benchmark among peripheral issuers — by around 45 basis points this year.

European Union proposals to force those who lend to banks to bear big losses if they fail added to banking sector worries at the heart of concerns surrounding peripheral debt. [nLDE7051NI]

Read more at Andy Sutton’s Extemporania