Cyprus yields hit one-month high ahead of landmark 30-year debt sale

LONDON: Cypriot borrowing costs hit a one-month high on Wednesday ahead of a debt sale that will see the country attempt to take advantage of favourable market conditions with its first 30-year bond issue.

Though investor sentiment has soured a touch this week and Southern European debt yields have come off their lows, analysts said the deal shows how the euro zone bond market has been supercharged by expectations of low interest rates and continued central bank stimulus.

Cyprus began marketing five-year and 30-year bonds on Wednesday. The paper will be sold via a syndicate of banks rather than through the primary dealer network.

The country's 10-year bond yields hit a one-month high of 1.61 pct in early trade on Wednesday, while yields on the island nation's current longest-dated bond, a 15-year note, hit a three-week high of 2.277 percent.

"Certainly it is a demonstration of the type of backdrop we are in at the moment and it also shows how far Cyprus has come from the crisis days," said one of the bankers managing the sale.

Cyprus' banking sector ran into trouble during the wider euro zone debt crisis, forcing it to accept aid from the European Union and the International Monetary Fund.

However, the country returned to the bond markets in 2014 and has regained an investment grade credit rating from two of the three main ratings agencies.

A successful 30-year debt issue would be as much a reflection on the broader market environment as it is of the country's own recovery, said Commerzbank rates strategist Rainer Guntermann.

"This combination of a view that growth will stay relatively sluggish and inflation will be lower and rates will stay lower almost forever is fuelling this hunt for yield, and investors are taking more risk and duration for pick up," he said.

However, the deal comes at a time when sentiment has taken a slight turn for the worse, with yields on higher-rated euro zone debt dipping in response to faltering global stock markets.

Germany's 10-year government bond yield, the benchmark for the bloc, was a basis point lower at 0.034 percent, while the closely-watched Italian/German 10-year yield spread was close to its widest level in two months at 254 basis points.

"Souring stock markets are fuelling demand for euro zone debt, but oil prices should limit the downside," Commerzbank's Guntermann said.

Oil prices hit their highest in about six months on Tuesday as sources said Gulf OPEC members were ready to raise output only if there was demand before offsetting any shortfall following a US decision to end waivers for buyers of Iranian crude.