Autumn is here, and the investor is back.
A flight to quality dominated the European government bond market over the summer, with German yields sinking.
But as just as children return to school, government treasuries return to the bond market. This time around, new issuance may feature the longest maturities on offer since March, including 43 years from France and 16 years from Spain. This will bump up against a relative shortage of cash, which means would-be buyers now have the power to demand a better premium to participate. Higher yields -- and steeper yield curves -- are in store.
Overall supply for September may exceed 70 billion euros ($83.3 billion), a 50 percent uptick from the August lull, according to Citigroup. About 20 billion euros comes this week -- possibly more, if Austria markets a syndicated 10-year security in addition to its regular auction supply.
Thursday will be dominated by Spain and France, which together will auction about 14-15 billion euros. These will price right ahead of the European Central Bank meeting, which should force both countries to offer higher yields. With President Mario Draghi on deck to discuss the fate of quantitative easing, investors will want to be compensated for the risks of the European fixed-income universe getting a nasty shock hours after they've bought the bonds.
It's not just the schedule for tapering. Even if Draghi delays the inevitable until October, there's still the matter of the inflation outlook. Officials have cut their projections at each of the last two forecasting rounds, and a third reduction could well herald the extension of bond purchases. On the other hand, hand-wringing on risks of faster inflation could provoke a pickup in yields. That's less likely, but the point is what investors will be willing to accept hours before Draghi speaks.
Not to downplay the reach of Super Mario -- or the risk of thermonuclear war -- the big story of the month is cash. Debt maturities are going to be pretty light, with no redemptions this week or next. After about 52.6 billion euros came due last month, 43 billion euros is maturing in September. That should make the surge in supply harder to swallow, but it's amazing how offering investors higher yields can aid their digestion.
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