LONDON Euro zone debt issuance got off to a solid start to 2011 on Wednesday as Germany sold 3.9 billion euros of bonds and Portugal raised 500 million euros from short-term bills, but analysts warned tougher tests lay ahead.
Euro zone states have heady supply in the pipeline for the first two months of this year totalling some 175 billion euros, according to Barclays Capital. Any sign of waning investor demand would see yields rise and reignite worries over the most indebted countries' ability to fund themselves.
Portugal, widely seen as a candidate for the next euro zone bailout after Greece and Ireland, cleared its first funding hurdle of the year. Yields rose at its sale of six-month treasury bills but stayed within expected limits.
Demand for safe haven Germany's 10-year Bunds was higher than at a series of lacklustre sales at the end of 2010 when some investors shunned the country's debt on fears Berlin could face rising bills to bail out struggling euro zone members.
"It's certainly a reasonable start," said Huw Worthington, a European fixed income strategist at Barclays Capital. "For Portugal levels were higher than they wanted to pay but there is certainly demand out there."
"If you are waiting for a failed auction, you are going to be disappointed."
Euro zone governments are poised to issue 842 billion euros in government bonds this year, compared with 911 billion euros' worth in 2010.
Yields on bonds issued by countries struggling with debt and banking problems have risen sharply in recent months as investors have sought higher returns to compensate for their increased risk.
German debt is usually seen as the safest in the euro zone but bids for its bonds have been less than the amount on offer at the last three sales on fears Germany will bear the lion's share of any future bailouts.
SPANISH SALE EYED
Total bids for the Bunds on Wednesday were 1.6 times the amount sold to investors, versus 1.2 times in November. Average yields rose to 2.87 percent from 2.59 percent at the last sale, broadly in line with moves in the secondary market.
Demand for the Portuguese bills was also up on the last such sale but so too were yields, which rose to 3.686 percent from 2.045 percent at the last auction in September.
"The fact that neither bonds, nor equities, nor currencies have been fazed by today's Portuguese auction is a small victory for the euro zone's periphery. No panic is good news," said Lena Komileva, head of G7 economics at Tullet Prebon.
Analysts said next week's auction of five-year Spanish bonds would be a better gauge of demand for debt issued by the highly indebted states on the euro zone periphery.
"Any hint that peripheral sales are not going well will be seized on by the market," said Eric Wand, rate strategist at Lloyds Bank in London.
He expected the sale to go well and said the greater test would be a sale of syndicated Portuguese bonds, expected in the first quarter.
Peripheral bond yield premiums over benchmark Bunds narrowed slightly after the auctions but Worthington said no big change could be expected until early supply was out of the way.
Separately, the debut issue from the European Financial Stabilisation Mechanism (EFSM) for the European Union is expected to price on Wednesday, with proceeds expected to help fund the bailout of Ireland.
(Additional reporting by William James in London, Andrei Khalip in Lisbon and Brian Rohan in Berlin; Editing by Susan Fenton)
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