EURO GOVT-Supply weighs on Italian, Spanish bonds

Tue Jan 15, 2013 4:33am EST

Related Topics

* Spanish, Italian bond yields rise as supply looms

* Spanish yields may have reached a floor - analyst

* German Bunds rise after Bernanke comments

By Marius Zaharia

LONDON, Jan 15 (Reuters) - Spanish and Italian bond yields rose on Tuesday, weighed down by the prospect of heavy bond sales, leading some analysts to question whether a rally in peripheral euro zone debt had gone too far.

At the other end of the euro zone credit spectrum, German Bund prices rose after Federal Reserve Chairman Ben Bernanke, speaking on Monday, gave no clear hint on when the U.S. central bank would tighten its ultra-loose monetary policy.

Italy kicked off a 15-year bond sale by syndication on Tuesday, and Spain is due to sell up to 10 billion euros in bills and bonds on Tuesday and Thursday, respectively.

With Spain only at the beginning of the most challenging 2013 funding programme in the euro zone, some analysts say the recent rally in peripheral debt may have gone too far and yields could start rising gradually as supply takes its toll.

"We're seeing a bit of widening in the peripherals driven by supply factors," Rabobank rate strategist Lyn Graham-Taylor said. "Spain's next issuance is a really chunky figure ... There's a realisation of the volumes to be taken down."

"Supply, in our view of the world, will start to increase pressure on Spain and yields could start rising."

Spain's gross target for bond issuance in 2013 stands at 121.3 billion euros. Last year it issued 97 billion euros worth of bonds and made private debt sales of 16 billion euros, far exceeding its original target of 86 billion.

Ten-year Spanish government bond yields were last 3.7 basis points higher at 5.08 percent, extending this week's bounce off 10-month lows of 4.86 percent hit on Friday.

With the backstop provided by the European Central Bank's new bond buying programme -- which could be activated if a country seeks financial aid from its euro zone partners -- Spanish yields have fallen from close to 8 percent mid-2012.

In Italy, where the Treasury plans to sell its first 15-year bonds since September 2010, 10-year yields rose 2.7 basis points to 4.22 percent.

Bund futures rose 31 ticks to 143.08, tracking a move in U.S. Treasuries. The two assets are perceived as safe havens and often move in tandem.

The move in Treasuries was sparked by Bernanke's comments. He painted a cautiously optimistic economic outlook, but gave no clear hints the Fed would back away from its loose monetary policy any time soon, despite speculation that it will do so this year.

"Judging from ... (Bernanke's) comments yesterday evening he remains comfortably in the dovish camp and hence defused some concerns on the Fed thinking of an early exit later this year," Lloyds strategists said in a note.

Traders said Bernanke's stance was surprising only for a small part of the market -- those investors who bet the U.S. economy will pick up considerably this year. Therefore, room for a rise in Bunds was limited.

"He was always going to err in that direction," one trader said.

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