Investors pile into euro zone bonds as 2021 debt sales kick off

LONDON: Strong demand for new issuance by Germany, Italy and Ireland on Tuesday showed investors keen to bet on a powerful combination of European Central Bank bond-buying and the European Union's recovery fund propping up the euro zone bond market in 2021.

Germany sold around 4.8 billion euros ($5.90 billion) worth of 2-year Schatz.

Italy saw orders worth over 95 billion euros ($116.69 billion) for a new 15-year bond being sold via a syndicate of banks, at a rate of 8 basis points above the March 2036 BTP yield.

Ireland was also seeing strong demand for a new 10-year bond, also being sold via banks, according to one lead manager in the deal. It expects to raise 4 billion to 5 billion euros, up from an initial target of 3 billion to 4 billion euros. Full details of the sale are expected later on Tuesday.

"We have the steady drumbeat of negative COVID news and that is something relatively key to the ECB pledges to buy bonds and to support the economy," said ING senior rates strategist Antoine Bouvet, who expects peripheral bonds to do well this year.

"Therefore from the point of view of investors, this is an additional comfort blanket to go and snap up all the bonds that are being sold in January," he said.

New, tighter lockdown measures were announced for the UK on Monday. Italy decided to keep nationwide restrictions in place and the lockdown in Germany is expected to be extended.

But a combination of ECB bond-buying and the EU recovery fund, which is seen as limiting the economic fallout from COVID-19 in the hardest-hit European countries, such as Italy, gave investors an incentive to buy euro zone government bonds.

"It's about 80% the ECB and about 20% the EU recovery fund - it's that sort of a magnitude. The ECB buying is happening now, the Euro recovery fund is going to start making payment second half of this year _ it's slower burning, I think," said ING's Bouvet.

Elsewhere, attention was also focused on US runoff elections in Georgia, which will determine the make-up of the Senate and thus President Joe Biden's ability to pursue his preferred policies.

Analysts said that a win for the Democrats could add to already-rising inflation expectations in the United States, widening the rate differential with the euro zone.

At 1223 GMT, Germany's benchmark 10-year yield was at -0.596%, flat on the day, while Italy's 10-year yield edged up by around one basis point to 0.53%.

Ireland's 10-year yield was down 1 basis point at -0.332% and the spread over Germany - which has shown little impact from Brexit developments in recent months - was a touch tighter.