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What New Euro Zone Bailout Bond Tells Us

Tuesday, 16 Oct 2012 | 7:55 AM ET
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The books for the new euro zone bailout fund bond are expected to open Tuesday, and the demand and pricing for the bond could show plenty about how the market views the euro zone's prospects for success in the tussle with its debt crisis.

The five-year bond for the European Financial Stability Facility (EFSF), which has so far bailed out Ireland, Portugal and Greece , is expected to raise around 5 billion euros ($6.5 billion) for the fund.

The EFSF and its successor the European Stability Mechanism (ESM) will play an important part in the upcoming ECB interventions on the secondary market, so successful bond issuances are vital to the euro zone bailout project.

Muted demand for a similar issue at the end of August caused concern in the markets — and a good reception for Tuesday's issuance should indicate that the market is cautiously optimistic about the prospects for the euro zone , despite reports about Spain seeking a full bailout.

If the EFSF has to pay a higher premium for its bond issues, this will ultimately result in higher funding costs for the countries to which it is giving financial aid.

"The one obvious ongoing issue is going to continue to be supply, as the liabilities of the EFSF and ESM are going to continue to build, " Charles Diebel, head of market strategy at Lloyds Banking Group, told CNBC Tuesday.

"They have got a lot more issuance to do, and they have a whole yield curve to build."

Traders expect the next big issuance to be a 2018 maturity, probably issued early next year.

The pricing of Tuesday's issuance is "competitive, " and the issuance seems to be going "relatively well" according to Diebel.

Norbert Arul, European Rates Strategist, RBC, said the paper is "attractive", particularly compared to the cost of similar bonds issued by euro zone countries like France and Belgium, which are increasingly viewed as part of a "soft core" of countries, closer to the peripheral economies of the euro zone than its core.

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