Will Investors Buy More Euro Bonds?

01/10/2012 6:30 am EST

Focus: BONDS

Jim Jubak

Founder and Editor, JubakPicks.com

A large amount of euro bonds are maturing soon, and more will need to be sold next month. This could be a challenge, says MoneyShow’s Jim Jubak, who will be watching these markets closely.

For the week ahead—in fact, maybe the next three to six weeks ahead—pay attention to bonds. Eurobonds.

We’ve had it drummed into us that January is going to be this huge challenge for European governments. They’ve got to raise $100 billion in bonds, but that’s really the gross amount. It turns out that they’re maturing the same amount of bonds. So, the net that that they have to raise is only €1 billion.

Now, there’s a huge task involved. After all, you know, they’ve got to convince people whose bonds are maturing to re-up and to buy these bonds again. If you were, say, an investor in Italian government bonds and your bonds have matured, you might just go, “I’m glad I’m out of that,” but the Italian government has to convince those people to roll them over.

That’s a very different task than finding new money. If you’re talking about finding new money, February is actually much worse than January. In February, the amount of gross fundraising through gross bond sales is about the same, about €100 billion, but the amount of net bonds, the amount of new money that governments have to find is about €25 billion.

So, it’s not just a question of convincing people to roll them over, and that’s a relatively simpler task because people have portfolio constructions and allocations…so they might just want to just continue that. In this case, they’ve actually got to find 25% new investors.

They have to find extra money. They’ve got to find people who don’t have allocations to this asset who are interested in this asset. A really, really tough sell.

So, if you’re looking for a better month in the first quarter, January is not as terrible as it seems from a euro-debt perspective. It’s February that really could give us some challenges in terms of bond auctions that don’t raise very much, bond auctions where the yields are higher than we expect, and that might spook the markets.

So January should be better than we expect, maybe right now. February is where the real danger lies, and that’s what I’d look for in the weeks ahead.

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