(Bloomberg) — An upcoming surge in euro-area bond sales should be more than swept up by the record amount cash of sitting idly in the economy, potentially adding fuel to the rally sweeping across the region’s debt markets.
Next week, bond offerings in the eurozone are expected to rise five-fold, with Germany, Italy and France, among others issuing a combined 30 billion euros ($35.4 billion) worth of securities, according to Commerzbank AG. That’s still less than the amount of debt coming due.
The supply also comes as excess liquidity in the euro area ballooned past the 3-trillion-euro mark for the first time ever last week, thanks to unprecedented support from the European Central Bank.
The monetary authority’s liquidity injections have already pushed yields on some of the region’s riskiest borrowers to record lows. With speculation now growing that the ECB will expand and extend its program in December, demand for euro-area debt could prove solid at the auctions, spurring the next leg of the rally.
“The period from now until year-end does provide a fertile backdrop for further spread compression,” UBS Group AG strategists including Rohan Khanna wrote in a note to clients, referring to the yield premium between peripheral debt and German bunds.
While U.S. election uncertainty could lead to some volatility, “the ECB has enough firepower to fight against any unwarranted widening in spreads,” Khanna said.
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Offering additional support will be around 41 billion euros of redemptions from Germany, Italy and Ireland, which will need to be reinvested. Meanwhile, coupon payments from these three nations and Portugal will total over 1 billion euros next week.
National finances will also