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Dow Jones News Wires Feature Spotlight Ideas

Friday July 26th 2013

This story was published by Dow Jones on DJ Dominant, a premium part of DJ coverage and not freely available on Internet, so it doesn’t have a normal link.

26 Jul 2013 14:29 CEDT
Dow Jones  “Euro-Zone Sovereign Issuers Prepare for Busy Week Before August Lull”
By Emese Bartha
Euro-zone sovereign issuers are preparing for a busy week next week before the seasonal sharp slowdown in primary-market activity in August.
All auctions will take place before the monthly rate-setting meeting of the European Central Bank, whose accommodative policies have helped drive down the borrowing costs of the more financially stretched sovereigns.
The ECB is widely expected to maintain the status quo at its next meeting, after giving some forward guidance at its July meeting by saying rates would be kept "at current or lower levels for an extended period of time."
Belgium, Italy, Germany and Spain are set to sell government bonds totaling up to around 16 billion euros ($21.1 billion). Redemptions from Spain and Italy, meanwhile, will amount to EUR39.6 billion next week, and a further EUR17.5 billion in coupon payments will flow back to investors, according to Citigroup data. This cash is likely to bolster demand for next week's issues.
Belgium will kick off the auctions with four government bonds, known as OLOs. These will include benchmark five-year 1.25% June 2018 and 10-year 2.25% June 2023 bonds, as well as 3.00% September 2019 and 4.25% March 2041 OLOs. The total offering size will be EUR2.2 billion to EUR3.2 billion.
Italy, which cancelled its mid-August bond auction in line with previous years' practice, will launch the 4.50% March 2024 BTP--a new 10-year conventional government bond--and reopen the 3.50% June 2018-dated BTP. The combined offer size will be EUR5 billion-EUR6.75 billion.
Yields on euro-zone benchmark German debt have risen this week, after euro-zone purchasing managers and ECB lending survey data earlier in the week provided fresh evidence of gradual economic improvement in the single-currency area.
Nonetheless, "we are unlikely to be at the start of a more permanent uptrend yet," said Jan von Gerich, chief strategist at Nordea. "Any move higher towards the recent high of 1.86% in German 10-year yields should thus be seen as a buying opportunity," he said.
Germany will offer EUR2 billion of the 2.50% July 2044 Bund on Wednesday. Yields of 30-year German debt have been less volatile recently than those of the 10-year paper. The yield on the 2044 Bund is trading at 2.50%, up markedly from the record low funding level of 2.16% for this maturity at its previous auction on April 24.
Spain will auction the 3.30% July 2016 and 3.75% October 2018 bonds on Thursday and, in line with its practice in previous years, said it had canceled the mid-August bond auction, as was widely expected. As the Spanish Treasury has already raised more than 73% of its full-year bond issuance target, the auction is likely to have a relatively small offering size, which is scheduled to be announced Monday.
Spain's economy likely contracted 0.1% in the second quarter from the first, its central bank said earlier this week, in the latest sign the country may be close to emerging from a recession that started in late 2011. Preliminary gross domestic product data due Tuesday are expected to confirm a seventh consecutive quarter of decline. Some analysts believe, however, that the recession will go on for a while.
While the recession in Spain is projected to continue in 2013, and economic growth in 2014 will be tepid at best, as its cost competitiveness remains 14% above that of the euro-zone core, markets are rather relaxed about the country, said Stephen Pope, managing partner of Spotlight Ideas, a U.K.-based research firm.
"The markets appear to be fairly relaxed over Spain's medium-term prospects as there is no doubting the government's determination to satisfy its consolidation targets in structural terms even if the automatic stabilizers have to be activated to operate at full capacity," Mr. Pope said, referring to policy measures, such as taxation, and project and welfare spending that a government uses in a market economy to smooth out fluctuations in real GDP.
Below are the latest Dow Jones Newswires estimates of progress made by countries in meeting their bond-sale plans in 2013.
Austria (*)           EUR20 bln-EUR24 bln            EUR12.75 bln                    Around 58%
Belgium (**)        EUR40 bln                             EUR27.70 bln                    69.3%
Finland               EUR13 bln                             EUR6.5 bln                       50.0%
France (***)         EUR169 bln                           EUR134.17 bln                   79.4%
Germany            EUR173 bln (regular)             EUR101 bln                       58.4%
                           EUR8-12 bln (link)                  EUR7 bln                         Around 70%
Italy (****)            EUR450 bln                            EUR152.96                        68.0%
Netherlands        EUR50 bln                             EUR40.45 bln                    80.9%
Slovakia(*****)     EUR8.3 bln                            EUR6.72 bln                      80.9%
Spain                  EUR121.3 bln                        EUR88.88 bln                    73.3%
(*) Austria's funding completion is based on a bond sale target of EUR22 billion, which is the mid-point of Austria's indicative bond sale range.
(**) Belgium revised its 2013 gross borrowing requirements, including its bond issuance, on June 18 to allow more pre-funding for 2014. Its new bond issuance target is EUR40 billion, compared with EUR37 billion previously.
(***) France's annual bond issuance target includes inflation-linked bonds and is net of bond buybacks.
(****) Italy's issuance target combines bonds and Treasury bills. The Treasury doesn't give a breakdown. The Italian bond issuance estimate includes conventional bonds, zero-coupon bonds, inflation-linked bonds and retail bonds. Dow Jones Newswires estimates Italian bond issuance at approximately 50% of the total borrowing figure. This is largely consistent with the near-equal split between bonds and treasury bills in recent years.
(*****) Slovakia's issuance target combines bonds, Treasury bills and other debt instruments. The debt agency doesn't give a breakdown. Dow Jones Newswires estimates Slovak bond issuance at 100% of the total borrowing figure.
Write to Emese Bartha at
Twitter: @EmeseBartha
(END) Dow Jones Newswires
July 26, 2013 08:29 ET (12:29 GMT)                Copyright (c) 2013 Dow Jones & Company, Inc.

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