Low-rated eurozone bond yields rose on Tuesday as investors made room in their portfolios for an unexpected Italian bond sale, while growing chances of an election re-run in Madrid added to the long list of upcoming political risks. Italy issued a 6.5 billion-euro 20-year bond, pricing the new 2.25 percent, September 2036 benchmark at 39 basis points over the 1.65 percent March 2032 BTP, according to Thomson Reuters' IFR.
Over 17 billion euros' worth of orders were placed for the new bond, IFR reported, adding to planned eurozone government debt issuance of around 17 billion euros this week. Yields tend to rise during bond sales as investors sell their existing stock of debt to make room for new issues, which tend to be sold at a slight premium. "The Italian auction has put some pressure on the Spanish curve going into auctions in Spain on Thursday," said Patrick Jacq, Europe rate strategist at BNP Paribas.
The new supply from Italy adds to the 4 billion euros of bonds sold between Belgium and Slovakia on Monday and around 13 billion euros expected from Germany, France and Spain later this week. Political uncertainty is also keeping investors wary. Fresh elections in Spain look likely and an escalation of Europe's migrant crisis, fraught negotiations between Greece and its creditors and Britain's vote on European Union membership are imminent.
Members of Spanish anti-austerity party Podemos on Monday rejected joining an alliance with the left-wing Socialists that includes centrist Ciudadanos, the latest failed attempt to form a government since inconclusive elections in December. Failure to get enough support to agree on a new prime minister by May 2 would trigger another election, most likely in June. Italian and Spanish 10-year yields rose around 5 basis points to 1.40 percent and 1.54 percent
respectively. The gap or spread to the German equivalents, the bloc's benchmark, widened by 1.7 bps at 0.18 percent. "We've also got all of these political factors building up ... and the sentiment is going to be towards spreads widening from here," Mizuho strategist Peter Chatwell said. There was little market reaction to a survey showing investor morale rising in Germany. Mannheim-based ZEW said its monthly economic sentiment index rose to 11.2 points in April from 4.3 the previous month, beating a Reuters consensus forecast of 8.0. Oil prices, which have been pulling inflation expectations and yields lower, have also fully recouped the losses they saw after a deal by Opec and non-Opec producers to freeze oil output fell apart on Sunday.
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