* Spanish govt bond auction soars, French sale mixed
* German state NRW swamped with demand for bond issue
* Concerns over liquidity and price discovery persist
* Italian auctions due March 31 are key, analysts say
By Abhinav Ramnarayan
LONDON, March 19 (Reuters) – The European Central Bank’s promise of hefty monetary stimulus brought buyers flocking back to euro bond markets on Thursday, with Spanish and French auctions seeing reassuring demand and Germany’s North Rhein Westphalia swamped with bids.
Nervousness remained in the market, however, even after the ECB announced another 750 billion euros of bond buying, with many in the markets pointing to thinner demand for a long-dated French bond as a sign of this uncertainty.
As a result, concerns over upcoming Italian bond auctions, the country worst hit by the coronavirus, remain high.
Before the auctions bankers who sell debt on behalf of the governments, so-called primary dealers, were on high alert for signs of trouble but Spain and France raised more than 12 billion euros between them.,
And a message from syndicate bankers to investors seen by Reuters showed North Rhein Westphalia’s (NRW) 1.3 billion-euro tap of April 2023 bonds was heavily oversubscribed.
“The Spanish auction was a really good sign as the periphery has taken an absolute beating over the last few sessions,” said an official who works for one of Spain’s primary dealers.
‘Periphery’ refers to poorer southern in the euro zone.
“There were some areas of concern over the French seven-year tranche, but add in NRW and it was an encouraging day given the level of volatility we have seen … It could have been a very different story if the ECB hadn’t stepped in,” he said.
Government bond issues are important at this time as governments are looking to ramp up spending to combat the crippling economic effect of the coronavirus outbreak.
The ECB on Wednesday launched the emergency bond purchase scheme to stop a pandemic-induced financial rout from shredding the euro zone’s economy and raising fresh concerns about the currency bloc’s viability.
The announcement came after Southern European government bonds were set for one of their worst days since the euro zone debt crisis of 2010-2012.
“Simply speaking, the market was not far from being closed, and bonds had to sell off to try and accommodate the supply. The ECB announcement has caused a big shift in sentiment,” Mizuho’s head of rates Peter Chatwell said.
Market liquidity would remain an issue, Chatwell said, with low trading volumes due to school closures and much of Europe being shut.
Also, France’s seven-year debt tranche took in orders of just 2.38 billion during Thursday’s sale – one of the lowest figures for that maturity in several years, a primary dealer said.
It received strong demand for shorter three-year and five-year bonds, showing investors are wary of longer-dated debt.
Heightened market volatility is making it difficult to assess a bond’s fair value and this could affect future issuance, traders say.
Two primary dealers told Reuters that the prices on screens did not always reflect reality.
“Most of the trading is taking place over the phone, and they are not trading at the price you are seeing on the screens,” said one dealer, adding the displacement was anywhere between 15 and 60 basis points.
The second person said expectations of higher government issuance to fund spending promises also were making investors uncertain about where bonds should price.
The real test of investor appetite may come on March 31 when Italy, arguably the most fragile euro zone state and the worst hit by coronavirus, holds an auction. Concerns over Italy’s debt sustainability remain extremely high as do its borrowing costs. (Reporting by Abhinav Ramnarayan, Additional reporting by Dhara Ranasinghe; Editing by Sujata Rao and Alexander Smith)
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