Long-Dated Euro Zone Yield Up, Spain 50-yr Sale Fills Market

Spain sold 5 billion euros of 50-year bonds on Tuesday, following Belgium’s sale of 50-year bonds the week before, generating a whopping 65 billion euros of demand in the process.

While the deal priced successfully and traded steadily in the aftermarket, it has highlighted a tension in the bond market between monetary stimulus and worries over fiscal stimulus-fuelled inflation.

“There is high demand for long maturities because of the hunt for yield, so debt agencies are taking advantage with 50-year issuance,” said DZ Bank rates strategist Daniel Lenz.

“But on the other hand, there is discussion over reflation and a concern that long-dated bonds may suffer the most in case of a change in the inflation path,” he added.

Reflation is a term used to describe the boost to inflation when a large fiscal stimulus programme is enacted, and Lenz was referring to expectations that a $1.9 trillion stimulus programme in the United States would lift the yields of major global bond markets.

Borrowing costs were slightly higher across the board in euro zone bond markets, but long-dated yields rose more than others, continuing the trend of recent weeks.

Spain’s 30-year bond yield rose 1.5 basis points to 1.03%, and was trading near a four-month high of 1.048% hit on Monday, when the deal was first announced.

Belgium and France’s 30-year debt rose a basis point each to 0.56% and 0.53% respectively in early trades before falling back to trade flat on the day, though both are within reach of five-month highs hit on Tuesday.,

Belgium’s recently issued 50-year bond has traded down to a cash price of 95.97, translating to a yield of 0.747%, having priced just last week at 98.304 with a yield of 0.69%.

Normally such ultra long-dated debt is seen as the riskiest form of government debt, and the most sensitive to interest rate rises.

However, European Central Bank stimulus has compressed yields to such an extent that investors have gone longer and longer along the government bond curve to pick up yields.

Germany’s 30-year debt, for example, is the only point of the Bund curve that has a positive yield.

Elsewhere, Italian government bonds held on to recent gains and yields hovered near one-month lows as former ECB chief Mario Draghi appeared to be on track to become the country’s next prime minister.

Italy’s 5-Star Movement will hold an online ballot of its members to decide whether to back a Draghi government after the prime minister-designate draws up an agenda, the group’s leader Vito Crimi said on Wednesday.