UPDATE 2-Safe EU bonds draw record demand, Italian yields rise

20 Oct 2020 / 22:16 H.

    * Euro zone periphery govt bond yields (Updates prices, adds background)

    By Yoruk Bahceli

    AMSTERDAM, Oct 20 (Reuters) - Record demand for the European Union's first bond sale backing its funding spree to aid coronavirus-hit member states highlighted the demand for safer assets on Tuesday, while Italian yields rose to their highest in more than a week.

    All attention was on the bond sale - part of a funding programme that will eventually make the EU one of the region's biggest borrowers - that has been awaited for weeks.

    The offer drew the highest demand for any bond sale, according to bankers running the sale, as it kicked off financing of its SURE unemployment scheme, attracting orders nearly 14 times the 17 billion euros ($20 billion) it aims to raise. The deal "shows strong demand for core bonds and core duration, probably as investors shun riskier assets, and price greater likelihood of more ECB easing by year-end", said Antoine Bouvet, senior rates strategist at ING.

    New debt issues tend to drive bond yields up as investors make room for new supply, but the broader market was relatively steady.

    Ten-year German bond yields rose by 2 basis point to -0.605%, but still held near last week's lowest level since March when the first wave of coronavirus infections spooked markets. French bonds also inched up 1 basis point.

    Christian Lenk, a rates strategist at DZ Bank, said he did not expect the EU bond sale to have much of an impact on euro zone governments' borrowing costs.

    "We might see some repercussions on the micro level, but I don't think we're going to see major disruptions."

    Lenk said investors would later continue to divide their attention between U.S. stimulus negotiations, with a deadline coming up later on Tuesday, and the record number of coronavirus cases in Europe.

    Italian bond yields rose to their highest in more than a week at 0.769% after hitting record lows last week, with bonds pressured by the rise in coronavirus cases in the country and the potential for a delay to the EU's recovery fund.

    A review of Italy's credit rating by S&P on Friday may also be weighing on the market, said Gareth Hill, fund manager at Royal London Asset Management, which he said has taken profits on its Italian debt holdings in recent weeks.

    S&P rates Italy the highest among the three main rating agencies - two notches above junk - so a downgrade may bring back fears about the potential for the others to junk Italy.

    Elsewhere, Germany sold 3.37 billion euros in a re-opening of a 2-year bond. ($1 = 0.8501 euros) (Reporting by Yoruk Bahceli; Editing by Emelia Sithole-Matarise, Alex Richardson and Tomasz Janowski)

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