By George Matlock
LONDON, March 27 (Reuters) - Euro zone governments sold around a third of their planned 2009 gross bond issuance in the first quarter but with borrowing rising, competition from other markets for investors' funds and an upset in UK gilts supply this week, the hardest part may still be ahead.
Excluding more than 100 billion euros of short-dated Treasury Bills, the 251 billion euros raised is well ahead of the 192.5 billion euros issued in the same period in 2008, as governments get serious about financing rising public deficits and restoring liquidity to cash-starved credit markets.
To put that into context, total supply last year from Germany, the euro zone's benchmark issuer, was 100 billion euros.
But this has also come against a backdrop of moving goalposts, as some sovereigns, among them Germany, France, Greece and even Finland, have revised upwards the amount they need to borrow this year. Finland still enjoys a public sector budget surplus but it too has felt the chill from the global recession.
An uncovered UK gilt auction this week served to remind governments that investors' appetite for lending to governments, even in countries where the central bank has committed to buying government bonds, cannot be taken for granted.
Sweden's Finance Minister Anders Borg said on Friday the UK's bond auction problems were a warning signal to all countries. [ID:nBAT002810]
So far, the European Central Bank has not bought bonds from the market although in a Reuters poll on Wednesday, economists gave a 50 percent chance the ECB would introduce so-called quantitative easing measures in the next few months. [ID:nLP338725]
Instead with a head start this month were the UK, which has bought 7 billion pounds of government bonds, 1.89 billion pounds of commercial paper and 128 million pounds of corporate bonds.
Second in the buyback stakes was the United States's Federal Reserve which this week bought $7.5 billion of debt and has just begun its $300 billion operation to buy Treasury debt over the next six months.
Since November, sovereign issuers have also had to compete with a new and fastest-growing fixed income asset class: government-guaranteed bank bonds. The so-called Garry Bonds are issued by commercial banks recapitalising in the liquidity crisis, but governments guarantee the paper, which typically offers a higher yield than government debt.
TACTICS
Smaller sovereigns have been more inclined to use unscheduled syndicated sales to issue bonds this year, with Greece a major beneficiary -- managing to sell nearly two-thirds of what it needs for the whole of the year in the first quarter. Similarly, Belgium has already sold 51 percent.
Germany, whose policy is one of keeping to a set calendar of auctions, has on the other hand managed only 23.4 percent of its 2009 issuance plans, including an 8 billion euro upward revision to the year's debt sales plan, according to Commerzbank research.
Added to that, Germany has distributed the extra bond sales in the normally trickier third and fourth quarters of this year.
"It is true that most sovereigns try to get the bulk of their issuance done in the first half of the year, as trading volumes slow in the holiday periods of the second half," said Wilson Chin, a bond analyst at ING in Amsterdam.
"But we think it is because of a large amount of German redemptions in July and September that Germany has done this, knowing there will be cash to pick up the bonds," he added.
See accompanying Factbox [ID:nLO45255]