LONDON: European bond yields edged higher on Tuesday but investors comfortably absorbed the first batch of fresh debt supplies this week, against a risk supportive environment that undermined demand for safe-haven assets such as German bonds.
Germany and Netherlands sold a combined amount of nearly 3 billion euros ($3.5 billion) of bonds on Tuesday, with Irish and Italian auctions to follow later in the week.
Demand was robust with bid-to-cover ratios for German debt broadly unchanged from previous auctions, indicating that a mild improvement in the euro zone’s economic prospects has failed to deter demand for the country’s bonds.
British government debt yields led European counterparts higher with benchmark 10-year maturities rising by more than four basis points to nearly 1.31 percent, on track for their biggest daily rise in more than a month.
Core German debt yields also rose around 2 basis points on both five and 10-year maturities .
“There is a lot of duration-heavy supply this week with the overall market sentiment for risk supportive as the markets digest them,” said Orlando Green, a fixed income strategist at Credit Agricole in London.
Italian industrial output data beat expectations, extending a recent run of improving economic momentum in the euro zone in relation to the United States.
A Citibank economic surprise index for Europe has rebounded sharply from multi-year lows in recent weeks.
The improvement in risk appetite led to increased demand for peripheral debt, with bond yields in Italy and Greece edging down by 2 to 4 basis points across the curve.
“Diminishing trade war concerns is also boosting risk appetite,” said Peter Chatwell, head of rates strategy at Mizuho based in London.
Expectations of a lengthy pause before the European Central Bank raises interest rates have also helped push down German 10-year bond yields by 50 bps from almost 2 1/2-year highs hit in February.
HIGHER BRITISH YIELDS
British gilt yields surged after data showed that economic growth picked up momentum on a monthly basis, boosting expectations of a Bank of England interest rate increase in August.
A flattening bias was evident in the British yield curve with shorter-end debt supported by expectations of a rate rise in August, while concerns over the longer-term outlook for the economy kept a lid on yields in longer maturities.
Spreads between 10- and two-year debt have tightened by more than 40 basis points from 2018 highs of 95 bps hit in February.
Greece’s bond market continued its outperformance, with 10-year yields falling by 10 basis points to five-month lows as rising risk appetite fostered demand for high-yielding debt.
“In a risk-supportive environment, Greece remains a high yielder and that is helping it outperform the market,” said Lefteris Farmakis, a macro strategist at UBS in London.