By Emese Bartha
Of DOW JONES NEWSWIRES
FRANKFURT (Dow Jones)--Euro-zone sovereigns have passed a week of heavy supply reasonably successfully but more crucial tests wait in the pipeline in the form of further auctions and syndications, with January a seasonally busy month for both.
A series of debt sales in fiscally frail or highly indebted countries--Greece, Portugal, Spain and Italy--were smooth this week, with Asian investors likely having stepped in heavily on the buy side, while purchases by the European Central Bank were cushioned the secondary market.
This better mood might have sparked Spain to add a second, longer-dated bond line to the one announced previously to its auction Thursday when it auctions the 4.85% October 2020 and the 4.80% January 2024 bonds for an amount to be announced Monday. Sales of Treasury bills, or short-term debt, from Spain, Greece and Belgium Tuesday, and from Portugal Wednesday, will serve as a warm up for Spain's test of long-term debt sale.
Contrasting some of the prevailing views, some analysts cautiously suggest a likelihood of sentiment change around Spain and also Portugal--the latter, nevertheless, still widely seen as the next candidate for bailout.
Lloyds Banking Group PLC said it has been hearing "more and more talk" about the fact that while the overall national financial position is more favorable for Italy, the relative low level of debt stock makes Spain better positioned in terms of sustainability of financing costs in the face of rising yields, at least in the short term.
"We think this might be a symptom of a market reassessment of Italy's status as 'darling of the peripheral investor'," the bank's analysts said.
Some debt market observers have hinted that the market relief, despite all the remaining stress, is a tentative sign that the markets don't want any more bailouts--a view Portugal's government agrees with.
Ciaran O'Hagan, a strategist at Societe Generale SA in Paris, meanwhile, said: "Ironically, Portugal for us is well on the road towards correcting its fiscal imbalances."
With heavy supply ahead, however, a cautious stance is justified.
"We should see the first EFSF syndication shortly. That should go well, like the European Union bond over a week ago," O'Hagan said, referring to the coming debut bond issue by the European Financial Stability Facility, the EUR440 billion funding vehicle set up after the Greek crisis for euro-zone countries in need.
"Syndications require substantial real money involvement," he said, preferring to hold AAA-rated bonds as a core position for some weeks and wait for the syndications before switching into peripheral bonds. In Societe Generale's view "Portugal for us is well on the road towards correcting its fiscal imbalances."
Triple-A countries, meanwhile also face a heavy test next week too, with up to EUR19.5 billion bonds on offer from Finland, Germany and France, while redemption and coupon payments won't help absorption of supply. In addition, a syndicated issue is whispered on the market to come from Belgium next week or the week after, possibly for a 10-year bond, or OLO, with a likely consequent cancellation of its first scheduled bond auction this year on Jan. 31.
Driven by the market pressure, Belgium is seeking to work out additional deficit cuts for 2011 to offset its fragile political system.
"Arguably, rising risk premium for Belgian government bonds may increase the pressure on politicians to move on forming a government by buying into compromises on the proposed state reform," said Rainer Guntermann, an economist at Commerzbank in Frankfurt. The political vacuum argues for sidelined exposure in Belgian bonds on a relative value basis, with the risk of further underperformance following any budget-deal induced near-term relief, if the political deadlock were to continue for longer, Guntermann added.
By Emese Bartha, Dow Jones Newswires, +49 69 2972 5516;
emese.bartha@dowjones.com
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