LONDON, Jan 31 (Reuters): Euro zone governments saw record demand for bond sales in January, showing that investors are ready to cover unprecedented funding needs if paid the right price.
Strong demand for the sales followed a surge in bond yields, as prices fell earlier in the month, driven in part by worries about high funding needs ahead of U.S. President Donald Trump's inauguration.
Benchmark 10-year bond yields hit multi-month highs across the euro zone , and Britain's briefly touched their highest since 2008.
Over 810 billion euros ($842.81 billion) of demand chased the 73 billion euros of euro zone government debt sold at syndicated debt sales in January, according to Reuters' calculations using data up to Jan. 30 from lead manager banks, debt management offices and LSEG's IFR.
That means demand exceeded supply by a record 11 times.
The "huge" demand showed concerns around how markets would absorb bond issuance were not as high as previously thought, Societe Generale strategist Jorge Garayo said.
Investors will have to buy a record amount of euro zone government bonds for a third straight year as the European Central Bank backs out of the market.
"If you look at the books, it's telling me, investors are happy to buy duration at some level," Garayo said, referring to the risk investors buying the bonds take on.
In syndications, governments hire banks to sell bonds directly to investors. The sales are tracked closely to get a clearer sense of demand than at auctions, where banks buy the bonds first.
Barclays' head of EMEA debt capital markets Lee Cumbes said the rise in bond yields, combined with swap spreads collapsing, had made the bond sales attractive for investors.
German 10-year bond yields have risen over 40 bps since the start of December. Elsewhere, U.S. Treasury yields are up around 90 bps from a September low and UK equivalents surged 100 bps last year.
Swap spreads measure the difference between the fixed rate investors pay on derivatives they use to hedge against interest rate risk and government bond yields.
Germany's 10-year yield exceeded swap rates for the first time ever late last year and the swap spread remains negative.
Investors such as banks often pay the swap rate to hedge exposure when buying these bonds, so earning a pickup over swaps makes bonds more attractive to buy.
