Record German debt sales deepen strains for Europe's battered bond market

By Harry Robertson

LONDON, Aug 21 (Reuters) - Germany and the broader euro zone are selling record amounts of bonds, adding to the pressures driving European bond yields to multi-year highs as the continent continues to borrow heavily amid crises ranging from COVID-19 to the Iran war.

Germany's 30-year government bond yield hit its highest since 2011 at 3.79% on Wednesday, with inflation fears tied to the Iran war adding to the selloff. The euro zone's benchmark issuer sold a bond at that maturity a day earlier with the highest yield in 15 years.

French yields are near their highest levels in 18 years, not far off 5%. Yields move inversely to prices.

Higher yields mean governments pay more to borrow, and they raise mortgage and corporate borrowing costs, potentially slowing economies.

It's a challenging backdrop as governments and companies look to sell bonds again after the usual summer lull. In the longer term, there are also few signs that bond sales will slow.

Commerzbank estimates that German government bond supply will hit a record high in 2027 of €400 billion ($468 billion) in gross terms, up from €349 billion this year.

“We’re talking about a general situation where there's a lot of money that needs to be raised in bond markets, and yields are adjusting to reflect that,” said Ales Koutny, head of international rates at $12 trillion asset manager Vanguard.

Germany on Wednesday saw soft demand for a 10-year bond sale, selling €3.8 billion versus guidance of €6 billion.

“We have post-summer supply coming back,” said ING senior rates strategist Benjamin Schroeder, who added that Germany announced its 30-year bond syndication earlier than many in the market had anticipated. “So this adds a bit to the upward pressure on yields.”

In a tectonic shift, Berlin is casting off years of stringent borrowing rules and ramping up spending on defence and infrastructure to revive the flagging economy.

The German finance ministry told Reuters that the high levels of borrowing and rising yields reflect a “massive investment in security and defence” required after Russia's invasion of Ukraine.

EURO ZONE KEEPS SPENDING

Across the euro zone, governments continue to borrow heavily to support their economies after the COVID-19 and Ukraine crises, fund rising welfare and health bills as populations age, boost defence spending and grapple with increasingly volatile weather.

Barclays estimated in July that gross euro zone bond supply will hit a new record of €1.54 trillion next year, though it flagged significant spending uncertainties.

Net issuance, which takes into account maturing debt which investors typically recycle into bonds, is set to be slightly lower than in 2026 at €574 billion.

Barclays said France will face close scrutiny, with its deficit set to stay above 5% as its politicians struggle to agree on budgetary measures.

The European Central Bank is letting its bond holdings mature without reinvesting the proceeds as it shrinks its balance sheet, adding to the debt private investors must absorb.

“Market yields to some extent are reacting to that because if there's more paper to offer and an unchanged willingness or appetite of investors to accept that paper, you need a higher price,” said Michael Weidner, co-head of global fixed income at Lazard Asset Management, about the rise in government and corporate bond issuance more broadly.

“We're somewhat hesitant regarding buying into the very long end,” he said. “We've bought into 10s (10-year bonds)," he said, adding that German 10-year bond yields around 3.27% were attractive.

(Reporting by Harry Robertson; editing by Dhara Ranasinghe and Hugh Lawson)