Heavy European Supply Set To Test Bond Demand - Preview
- Eurozone sovereign issuance set to rise to around EUR 41-50 bln - No US Treasury auctions scheduled; USD 171 bln of cash returns to investors - UK DMO to sell GBP 4.25 bln 10-year gilt; Japan, Australia and New Zealand also active
Fixed-income markets face a sharp increase in European sovereign issuance this week, with supply spread across the curve and a particularly heavy concentration around the 10-year sector.
The Eurozone will provide the bulk of global duration, with Belgium, the Netherlands, Italy, Germany, France and Spain all scheduled to tap the market. The EU will also sell bonds across three maturities. By contrast, the US Treasury has no auctions scheduled, while UK supply is limited to a single 10-year gilt sale.
UBS estimates around EUR 41 bln of gross Eurozone sovereign supply, including conventional, inflation-linked and floating-rate debt, while Citi puts total euro-denominated issuance closer to EUR 50 bln once EU issuance and other operations are included.
Europe Faces Heavy Duration Week
European supply gets Monday underway, with Belgium expected to raise around EUR 2.6-3.0 bln across 2031, 2034 and 2036 OLOs. The EU is also scheduled to tap its December 2029, December 2035 and February 2048 bonds for up to EUR 7 bln.
Tuesday brings one of the week's more notable transactions as the Netherlands launches a new 3.75pct January 2048 DSL, targeting EUR 5-6 bln. Italy is also active with a new February 2032 BTP and October 2036 BTP for a combined EUR 6-6.5 bln, alongside around EUR 1.5 bln of April 2036 CCTeu floating-rate paper.
Germany follows Wednesday with EUR 5.5 bln of the 3.00% August 2036 Bund.
Thursday is the busiest session, with Spain expected to raise around EUR 5-6 bln across 2029, 2036 and 2046 conventional bonds, alongside roughly EUR 500-750 mln of November 2036 inflation-linked debt. France will offer four OATs maturing between 2036 and 2048, targeting around EUR 10-12 bln, according to UBS.
The volume is notable both in outright terms and duration. UBS estimates around EUR 31 mln per basis point of conventional EGB DV01, the highest since May, with France accounting for roughly 30pct and the Netherlands around 25pct. Germany, Italy and Spain each contribute another 12-14%.
Citi, using a somewhat broader scheduled euro supply calculation, estimates EGB DV01 at around EUR 33 mln per basis point.
Cash Flows Offer Little Offset
The heavy European calendar receives relatively little support from maturing debt or coupon payments.
UBS estimates only around EUR 4 bln of cash flows this week, predominantly Italian coupons, leaving gross and net issuance unusually close. The bank expects this to be the heaviest week for both gross and net conventional supply over the coming four weeks.
BofA reaches a similar conclusion. Its calculations point to EUR 42.5-49.5 bln of gross European issuance against just EUR 4.1 bln of coupon and redemption flows, leaving approximately EUR 44.9 bln of positive net supply on its methodology.
The concentration around the 10-year sector could also be important. Belgium, Italy, Germany, France and Spain are all scheduled to bring paper in or around that maturity, while the Dutch 2048 launch and French 2048 OAT add meaningful longer-duration exposure.
Positioning provides an additional consideration. BofA said investors remain net short RX Bund futures, although positioning became less short during the latest reporting week as longs were added. French OAT futures positioning was broadly neutral following a period of unusually heavy activity.
US Supply Pauses, Cash Returns
The US Treasury calendar provides a stark contrast, with no coupon auctions scheduled this week.
Instead, investors receive a substantial amount of cash from existing Treasury holdings. Citi estimates USD 27.4 bln of coupon payments and USD 143.6 bln of redemptions eligible for reinvestment, giving total cash flows of around USD 171 bln.
The absence of new Treasury supply, combined with those repayments, leaves the US technical backdrop markedly different from Europe, where investors face one of the heavier supply weeks in recent months.
Treasury issuance resumes the following week, with 3-year, 10-year and 30-year auctions scheduled for 6-8 October. Citi's provisional calendar has USD 58 bln of 3-year notes, USD 39 bln of reopened 10-year notes and USD 22 bln of reopened 30-year bonds. Citi supply monitor
Single Gilt Auction In UK
The UK Debt Management Office is scheduled to auction GBP 4.25 bln of the 4.875pct July 2036 gilt on Tuesday.
Citi estimates the transaction carries around GBP 4.2 mln per basis point of DV01, with no gilt coupon or redemption flows eligible for reinvestment during the week.
That leaves the UK calendar straightforward in outright supply terms, although the 10-year maturity means Tuesday's auction should still provide a useful gauge of underlying demand for duration.
Asia-Pacific Supply Remains Active
Japan has two government bond operations scheduled. The Ministry of Finance is due to auction around JPY 300 bln of 40-year JGBs on Tuesday, followed by approximately JPY 2.8 tln of 2-year JGBs on Wednesday, taking Japanese nominal supply to around JPY 3.1 tln.
Australia will sell AUD 800 mln of the 3.75pct April 2037 ACGB on Wednesday, followed by AUD 1.2 bln of the 4.50pct April 2033 bond on Friday.
New Zealand rounds out the calendar Thursday, with the NZDMO expected to auction around NZD 450 mln of NZGBs.
Supply Snapshot
Sources: Citi Research, UBS, BofA Global Research
Bottom Line
European duration is likely to dominate the sovereign supply calendar this week. Around EUR 40-50 bln of euro-denominated issuance is expected, depending on methodology and the final auction sizes, with relatively modest coupon flows providing little offset.
The combination of substantial 10-year issuance, the new Dutch 2048 benchmark and long-dated French supply also makes the duration burden more significant than the headline nominal amount alone suggests.
Conditions elsewhere are considerably lighter. The UK brings one GBP 4.25 bln gilt auction, while the US Treasury has no supply and investors instead receive around USD 171 bln in coupon and redemption cash.
Asia-Pacific issuance remains steady rather than exceptional, with Japan supplying JPY 3.1 tln and Australia and New Zealand adding to the calendar.
Overall, the week's principal fixed-income supply test lies firmly in Europe, where investors face the heaviest conventional EGB calendar since April and the largest estimated DV01 burden since May.
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Heavy European Supply Set To Test Bond Demand - Preview
- Eurozone sovereign issuance set to rise to around EUR 41-50 bln
- No US Treasury auctions scheduled; USD 171 bln of cash returns to investors
- UK DMO to sell GBP 4.25 bln 10-year gilt; Japan, Australia and New Zealand also active
Fixed-income markets face a sharp increase in European sovereign issuance this week, with supply spread across the curve and a particularly heavy concentration around the 10-year sector.
The Eurozone will provide the bulk of global duration, with Belgium, the Netherlands, Italy, Germany, France and Spain all scheduled to tap the market. The EU will also sell bonds across three maturities. By contrast, the US Treasury has no auctions scheduled, while UK supply is limited to a single 10-year gilt sale.
UBS estimates around EUR 41 bln of gross Eurozone sovereign supply, including conventional, inflation-linked and floating-rate debt, while Citi puts total euro-denominated issuance closer to EUR 50 bln once EU issuance and other operations are included.
European supply gets Monday underway, with Belgium expected to raise around EUR 2.6-3.0 bln across 2031, 2034 and 2036 OLOs. The EU is also scheduled to tap its December 2029, December 2035 and February 2048 bonds for up to EUR 7 bln.
Tuesday brings one of the week's more notable transactions as the Netherlands launches a new 3.75pct January 2048 DSL, targeting EUR 5-6 bln. Italy is also active with a new February 2032 BTP and October 2036 BTP for a combined EUR 6-6.5 bln, alongside around EUR 1.5 bln of April 2036 CCTeu floating-rate paper.
Germany follows Wednesday with EUR 5.5 bln of the 3.00% August 2036 Bund.
Thursday is the busiest session, with Spain expected to raise around EUR 5-6 bln across 2029, 2036 and 2046 conventional bonds, alongside roughly EUR 500-750 mln of November 2036 inflation-linked debt. France will offer four OATs maturing between 2036 and 2048, targeting around EUR 10-12 bln, according to UBS.
The volume is notable both in outright terms and duration. UBS estimates around EUR 31 mln per basis point of conventional EGB DV01, the highest since May, with France accounting for roughly 30pct and the Netherlands around 25pct. Germany, Italy and Spain each contribute another 12-14%.
Citi, using a somewhat broader scheduled euro supply calculation, estimates EGB DV01 at around EUR 33 mln per basis point.
The heavy European calendar receives relatively little support from maturing debt or coupon payments.
UBS estimates only around EUR 4 bln of cash flows this week, predominantly Italian coupons, leaving gross and net issuance unusually close. The bank expects this to be the heaviest week for both gross and net conventional supply over the coming four weeks.
BofA reaches a similar conclusion. Its calculations point to EUR 42.5-49.5 bln of gross European issuance against just EUR 4.1 bln of coupon and redemption flows, leaving approximately EUR 44.9 bln of positive net supply on its methodology.
The concentration around the 10-year sector could also be important. Belgium, Italy, Germany, France and Spain are all scheduled to bring paper in or around that maturity, while the Dutch 2048 launch and French 2048 OAT add meaningful longer-duration exposure.
Positioning provides an additional consideration. BofA said investors remain net short RX Bund futures, although positioning became less short during the latest reporting week as longs were added. French OAT futures positioning was broadly neutral following a period of unusually heavy activity.
The US Treasury calendar provides a stark contrast, with no coupon auctions scheduled this week.
Instead, investors receive a substantial amount of cash from existing Treasury holdings. Citi estimates USD 27.4 bln of coupon payments and USD 143.6 bln of redemptions eligible for reinvestment, giving total cash flows of around USD 171 bln.
The absence of new Treasury supply, combined with those repayments, leaves the US technical backdrop markedly different from Europe, where investors face one of the heavier supply weeks in recent months.
Treasury issuance resumes the following week, with 3-year, 10-year and 30-year auctions scheduled for 6-8 October. Citi's provisional calendar has USD 58 bln of 3-year notes, USD 39 bln of reopened 10-year notes and USD 22 bln of reopened 30-year bonds. Citi supply monitor
The UK Debt Management Office is scheduled to auction GBP 4.25 bln of the 4.875pct July 2036 gilt on Tuesday.
Citi estimates the transaction carries around GBP 4.2 mln per basis point of DV01, with no gilt coupon or redemption flows eligible for reinvestment during the week.
That leaves the UK calendar straightforward in outright supply terms, although the 10-year maturity means Tuesday's auction should still provide a useful gauge of underlying demand for duration.
Japan has two government bond operations scheduled. The Ministry of Finance is due to auction around JPY 300 bln of 40-year JGBs on Tuesday, followed by approximately JPY 2.8 tln of 2-year JGBs on Wednesday, taking Japanese nominal supply to around JPY 3.1 tln.
Australia will sell AUD 800 mln of the 3.75pct April 2037 ACGB on Wednesday, followed by AUD 1.2 bln of the 4.50pct April 2033 bond on Friday.
New Zealand rounds out the calendar Thursday, with the NZDMO expected to auction around NZD 450 mln of NZGBs.
European duration is likely to dominate the sovereign supply calendar this week. Around EUR 40-50 bln of euro-denominated issuance is expected, depending on methodology and the final auction sizes, with relatively modest coupon flows providing little offset.
The combination of substantial 10-year issuance, the new Dutch 2048 benchmark and long-dated French supply also makes the duration burden more significant than the headline nominal amount alone suggests.
Conditions elsewhere are considerably lighter. The UK brings one GBP 4.25 bln gilt auction, while the US Treasury has no supply and investors instead receive around USD 171 bln in coupon and redemption cash.
Asia-Pacific issuance remains steady rather than exceptional, with Japan supplying JPY 3.1 tln and Australia and New Zealand adding to the calendar.
Overall, the week's principal fixed-income supply test lies firmly in Europe, where investors face the heaviest conventional EGB calendar since April and the largest estimated DV01 burden since May.