Euro zone governments plan to issue the same mix of debt at the start of 2008 as they did in the first quarter of last year, but the ongoing global credit crisis may result in a tweak to the 600-billion euros schedule.
A year ago, the 10-year Bund future contract was a full three points higher than this January, and investors and issuers had no inkling of the liquidity crisis that later spread from the U.S. subprime mortgage market.
Since erupting in mid-2007, the crisis has seen investors pull out of peripheral euro zone debt and invest more heavily in safest-haven German debt and specifically short-dated debt.
While the height of the credit crunch last year saw corporate bond and asset-backed securities issuance dry up almost completely, analysts do not expect such a drought in government bond supply this year.
Some observers contend that the credit crunch could result in government debt supply issue dates being juggled and unscheduled issuance curtailed. As the recipient of safe-haven flows, Germany is the least likely, however, to juggle plans.
"Countries with a clear calendar like Germany wouldn't want to change their schedules, even if it would favour them," said a senior bonds trader in Berlin.
"They will try to maintain issuance. But more flexible on calendars might be issuers like Spain, Italy and maybe the Dutch."
A sharp steepening of the 10-30 year yield spread to 43 basis points on Friday from 27 basis points at the start of the month was just shy of the two-year peak struck on Nov. 27.


The spread was 42 basis points early on Monday.
If steepness persists, it could discourage issuers from selling ultra-long-dated bonds at auction -- a view shared by an official at one of the sovereigns.
"Investors could in that case just try to buy the paper in the secondary market later on if issuers go ahead and auction them," the official said.
"We are not the largest issuer in Europe, but we know that some of the sovereigns might decide it is too expensive to issue the bonds if yields are driven up. We could defer an issue to the third quarter. Ireland last year left it until September to issue a bond, but we wouldn't want to go beyond October," he said.
Issues mulled or pencilled in, like index-linked or foreign currency bonds, might be cancelled.


STICKING TO SCRIPT


For now, however, the 15-member euro zone currency bloc is sticking to last year's script.
Typically, the first quarter is the busiest for supply, and the 198 billion euros of paper for sale represents a third of the 2008 calendar.
In cash terms, around 21 percent of the first quarter issuance will be bonds with a 2-3 year lifetime, while a further 13 percent will be 15-30-year paper. In duration terms, long-dated paper issuance will have the larger share.
"The issuance by the sovereign debt issuers so far is comparable with patterns seen last year. The subprime mortgage crisis does not appear to have changed the issuers' plans," said Wilson Chin, bond strategist at ING Financial in Amsterdam.
But lower volumes traded in the Bund future and flakey participation in bond auctions so far this year indicate a drop in investor confidence, said Chin.
The flop of the German Bund auction on Jan. 2 was followed by French bond sales the next day which also suffered. Since then, Dutch, Spanish, and Italian bond auctions recorded weak results. The main problem for all tenders has been the lack of investors.
Some investors may be nervous because of the ongoing subprime crisis, said ING's Chin.
While weaker participation in debt sales might make sovereigns anxious, other factors were likely also to have a bearing. Short-dated bond yields are sharply lower than 10-year yields not only because of safe-haven flows but also because of the prospect of falling interest rates in the world's biggest economy, the United States.
"Issuers could look at their Q1 tax take, which in a credit crisis might be smaller, in order to adjust supply in the third and fourth quarters," said Marc Ostwald, a bond analyst at Insinger de Beaufort in London.
But unlike the sensitive swaps market or corporate bond and asset-backed securities, Ostwald said: "Govvies would be less likely to see supply dry up."
Nor would supply bloat out. "Unless you underestimated spending, such as defence and security spending, you won't need to change overall issuance," he added.

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