"After the recent hiccups in the primary-market arena, all auctions have to be regarded as 'event risks,'" said Commerzbank strategist David Schnautz.
Bond supply will total around EUR19 billion from Italy, Slovakia, Belgium, Spain and France. This week the Netherlands, Germany and Italy--the latter with zero coupon bonds--sold a total of EUR7.74 billion in government bonds.
In the most recent sign of extremely difficult funding conditions, Italy on Friday paid a euro-era-high average yield of 6.504% to sell six-month Treasury bills.
"If the pattern of weaker auctions persists, it would portend a worsening outlook for euro-area sovereigns, in our view," said Morgan Stanley strategists in a note.
Auctions by countries with lower than an AAA credit rating follow a weak German bund sale this week, which signaled diminishing investor appetite even for the safest European debt as the continent's debt crisis is deepening, questioning the very future of the euro.
"It's a race against time. Can the euro zone accept Germany's quid pro quo for moving towards a fiscal union and, if it can, can it do it fast enough before the euro-zone bond market ceases to exist," said Nicholas Spiro, managing director at Spiro Sovereign Strategy, a consultancy specializing in sovereign credit risk.
At its last scheduled bond auction this year, Belgium will auction EUR1 billion to EUR2 billion in four bonds, known as OLOs, maturing in 2018, 2021, 2035 and 2041 Monday against the backdrop of increased pressure on Belgian debt amid difficult budget negotiations, a lack of permanent government for almost a year-and-a-half and renewed jitters around Dexia Bank.
The fragile political situation in the small euro-zone country, coupled with talks about a possible imminent downgrade, weighed on the country's debt, said Newedge economist Annalisa Piazza. "Next week's auction will be an important test as this is the last OLOs tap for the year and some investors might take advantage of the very attractive yields pick-up," she said.
Italy will tap markets Monday with issuance of up to EUR750 million in 2023-dated inflation-linked bonds, to be followed by up to the EUR8 billion sale of three nominal Treasury notes, maturing in 2014, 2020 and 2022.
"The way the market copes with the supply will also very likely set the tone for the Spanish auction on Thursday," said Commerzbank's Schnautz.
From a purely macro-fundamental perspective, there is no solvency issue that should affect Italy's market access, because it can withstand higher borrowing costs and even a sustained period of lower growth, said Gustavo Bagattini, European economist at RBC Capital Markets.
"Even under 'worst-case' scenarios of zero growth and bond yields reaching 8% or more, the debt stock is broadly stable," he said, adding that "the problem is that a confidence issue cannot be solved by simple arithmetic."
Spain dropped its original plans to launch a new three-year bond and will instead offer three existing bonds maturing in 2015, 2016 and 2017 for an estimated EUR3.5 billion. The same day, France will auction EUR3 billion to EUR4.5 billion of debt the same day, maturing in 2017, 2021, 2026 and 2041, while talks of its possible downgrade resurfaced.
"In our view, France maintains a credible deficit-reduction process. As such, part of the recent spread widening is not supported by fundamentals," said Newedge's Piazza.
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