European Sovereign Debt: Supply Isn't Only Issue

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK (BBH FX Strategy) -- This is a fairly busy week for European sovereign supply. Roughly 22 billion euros will be raised. This includes the 7.5 billion euros Italy raised yesterday by selling bonds and the 2.5 billion euros raised by Belgium in bills. Germany is seeking to raise 5 billion euros by selling 10-year bonds Wednesday and Portugal will sell bills. France and Spain plan on selling bonds on Thursday, Feb. 2.

Often in the market talk, the emphasis is on supply, but investors ignore the maturing issues and coupon payments at their own peril. For example, on Wednesday Italy has what appears to be the largest maturity of the year. It will return about 26 billion euros to investors. In addition, coupon payments from Italy and Spain will give investors another 16 billion euros.

The idea is that some of the funds freed up in the maturing issue and made available by the coupon payments will be used to buy the new issues. As we noted earlier this month, the maturing issues and coupon payments just about covered the new issuance.

Next month is a different story. Preliminary figures suggest that issuance next month may be in the same area as this month (around 80 billion euros), but redemptions and coupon payments will be considerably less, covering about half of the project new issuance.

At the end of next month, the European Central Bank will offer unlimited three-year money in the long-term refinancing operation. There has been market scuttlebutt that demand was going to be some multiple seen at first operation (489 billion euros). The new more liberal collateral rules will be in effect, and the stigma appears virtually nonexistent. In addition, the ECB has not indicated there will be another LTRO. Even though there has been some speculation of another, perhaps even longer-dated operation, banks have to regard it as the last one.

The headline story in the Financial Times today is "Banks set to double crisis loans from the ECB." The report says that "several" large banks from the eurozone told the FT that they "could double or triple" their takes at the LTRO. The collateral rule change involves instruments that some reports say are heavily weighted to French banks. While other countries' banks may not have as much of the new collateral, they may be more needy. It appears that Italian banks were the largest participants in the first LTRO.