France Plans Largest-Ever Bond Sale in Test of Rally’s Limits

(Bloomberg) -- France is taking advantage of record-low borrowing costs to plan its biggest-ever debt sale this week, just as signs emerge that investor sentiment may be faltering after a global rally.

The nation will sell up to 10.5 billion euros ($11.5 billion) of bonds Thursday, with its longer maturities offering respite to funds seeking positive returns amid a sea of negative euro-area yields. France’s Treasury, which is offering more debt this week than Austria, Germany and Spain combined, said that it has detected good demand.

The bumper sales in the first week after the region’s summer holidays, for a total of more than 18 billion euros, come as governments cash in on investors’ need for refuge from wider market turmoil. However, a German auction last month technically failed, leading its debt agency to admit the offering may have been too big.

“The very low level of yields offers a huge incentive to governments to ramp up their borrowing,” said Ciaran O’Hagan, head of euro-area rates strategy at Societe Generale SA.

France’s Treasury said it adjusts the size of auctions to demand. The nation will sell existing 10-, 15-, 20- and 30-year bonds, offering coupons of between 0.5% and 1.75%. The bonds were first sold when yields were much higher, compared to current market rates for benchmark 10-year debt at minus 0.4% and 30-year yields at only 0.4%.

On the same day Spain will sell five-, 10- and 50-year debt for a total of four billion euros. Ahead of that, Austria will sell five- and 10-year notes on Tuesday, while Germany will also sell five-year debt on Wednesday.

“This is a lot of duration for the market to take down, which should be a struggle at these levels,” said Peter McCallum, a fixed-income strategist at Mizuho International Plc. “I suspect demand will not be as strong as it was at the early July auction.”

That French sale attracted bids of almost 1.5 times the sum sold for debt maturing in 30 years. By comparison the German auction got only 1.05 times for the equivalent maturity, while a sale of 10-year bunds slipped to 1.92 times, from 1.99 times in the previous sale.

Still, expectations for the European Central Bank to restart its asset-purchase program as soon as this month are expected to benefit French bonds and may provide support for the auction. The ECB, which meets next week, has a greater capacity to buy French debt compared to Germany, based on its existing rules.

--With assistance from Gregory Viscusi.

To contact the reporter on this story: James Hirai in London at jhirai3@bloomberg.net

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Neil Chatterjee, William Shaw

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