###POV. DEMAND AT EGB AUCTIONS....>

EUROZONE ISSUANCE: ###POV. DEMAND AT EGB AUCTIONS IS UP BUT SO ARE YIELDS. WHY?

On a monthly average basis, the 10Y Bund yield has more than doubled from 0.35%

in December to 0.737% so far in Feb. One might be mistaken for thinking that

this must be because demand for bonds has evaporated but this does not seem

obvious given the rise of cover ratios at auctions. In Jan 2018, this leapt to

2.04x (1.77x last Jan) and so far in Feb it is 2.16x (1.79x last Feb). So far in

2018, the Bund contract equivalent and nominal amounts of supply is nearly

identical to 2017 at this time of year, so it is not because of lower supply.

- These seemingly inconsistent market developments of stronger demand but higher

yields could be explained by differing reactions between the term risk premium

(influenced by supply/demand elements) and the rate expectations components

contained in yields. The latter is clearly rising in response the economic

improvement whereas the term risk premium improvement would be far more modest.

Or, it could simply be that investors have largely sat on the side-lines when

rates were so low but are now happier to commit cash now that the ECB's QE

foot-print in the market is less.