Cash flow drought to hamper 18 billion euro sales

Three straight weeks of cash flows that were ample to take in euro zone government bond supply, sees that situation reversed with 18 billion euros-worth of bonds to be issued and no cash flows at all. The sales will be testing for Austria, Germany, France and Spain, all of which fall before a likely landmark European Central Bank meeting taking place on May 7.
The ECB is widely expected to cut rates by 25 basis points to 1.0 percent and to give a clear signal on whether and what kind of non-standard policy measures it will introduce to combat the currency bloc's liquidity crisis and economic recession.
In particular, investors want to see whether the ECB will find a means of buying corporate and possibly government bonds or launch an initiative resembling that.
Although some cash returned in the past three weeks to the market in the form of redemptions of maturing bonds may be put to work on the latest supply, much of it has been mopped up in several syndicated bond sales in the euro zone. Worse for sovereigns trying to issue fresh paper, the next few weeks are expected to see virtually no cash flows, with a small coupon payment offering in the week starting May 18.
"Overall, we expect gross supply to add up to some 18 billion euros," said Marcel Bros, bond analyst at Dresdner Kleinwort in Frankfurt. "With no redemptions or coupon payments due, next week's net issuance will equal gross supply - and this picture is hardly going to change in the weeks thereafter with only meagre coupon payments due in the week commencing 18 May."
Austria will kick off the latest week's supply with its regular bond auction. It will be the second time in a row that Austria will issue two lines of debt in one auction tender.
Issuance from Austria will total 1.925 billion euros, of which 10 percent will be held back by the authorities for market-smoothing operations. Austria will offer to the market a total of 1.75 billion euros of reopened 3.4 percent October 2014 and 4.35 percent March 2019 bonds.
On Wednesday, Germany will reopen its 2.25 percent April 2014 Bobl, when it issued 6 billion euros. On Thursday, hours before the ECB meeting, France will sell 6.5-8 billion euros of OATs: 4.25 percent October 2017, 4.25 percent April 2019, 5.5 percent April 2029, and 4.0 percent October 2038 paper.