Bond-Trader Countdown to December ECB Kicks Off With Supply Glut

  • Around 15 billion euros of sovereign debt to be sold next week
  • Demand to be ‘fairly solid’ given ECB backstop: Rabobank

As the countdown to the European Central Bank’s December policy meeting begins, bond traders betting on an extension of the institution’s asset-purchase program get a chance to load up on more euro-zone government debt next week.

Countries including Germany and Italy are scheduled to auction about 15 billion euros ($16 billion) of securities, according to calculations by Commerzbank AG, the third-ranked primary dealer of German debt. ECB President Mario Draghi said Thursday policy makers didn’t discuss tapering bond purchases, stoking speculation that the program will be extended. That’s brought their December meeting into focus, with a majority of respondents to a Bloomberg survey, conducted Oct. 7-14, predicting the ECB will announce changes on that day.

Speculation that the Frankfurt-based central bank was preparing to pare its 1.7 trillion-euro plan, which is scheduled to run until at least March 2017, triggered a slide in euro-zone debt earlier this month.

Germany’s 10-year bunds posted their first weekly gain since Sept. 30 before the nation auctions 3 billion euros of five-year notes on Oct. 26. Italy plans to sell five- and 10-year securities the same day, while Belgium, Finland and Portugal are scheduled to auction debt next week.

“There’s likely to be fairly solid demand for these papers, because we know that the demand in terms of the ECB’s backstop is not about to be tapered,” said Matthew Cairns, a strategist at Rabobank International in London. “The reality is that Mr. Draghi has all but suggested that there’s going to be a need to extend the program further.”

Yields Slide

Benchmark German 10-year bund yields fell five basis points, or 0.05 percentage point, this week, to 0.006 percent as of the 5 p.m. close in London Friday. The zero percent security due in August 2026 rose 0.511, or 5.11 euros per 1,000-euro face amount, to 99.944. The yield dropped to minus 0.003 percent Friday, the lowest since Oct. 7.

Next week’s supply may also be supported by sovereign-debt redemptions, which according to data compiled by Bloomberg, total about 44 billion euros from France and Italy, as well as around 21 billion euros of bonds coming due from Spain at month-end.

Portugal plans to sell as much as 1 billion euros of notes due in April 2021 on Oct. 26. The nation’s bonds were the best performers this week among euro-region sovereign securities, according to Bloomberg World Bond Indexes, amid speculation that DBRS Ltd. would maintain the country’s sole investment-grade rating which makes the debt eligible for the ECB’s QE program. DBRS affirmed its rating late Friday.

With annual consumer-price inflation in the euro region still a fraction of the ECB’s goal of just under 2 percent, the outlook “certainly remains fairly bullish in terms of support” for government bonds, Rabobank’s Cairns said.

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