EURO GOVT-Spain, Italy yields fall on solid debt sales demand

Tue Jan 15, 2013 7:35am EST

Related Topics

* Spanish bill sale exceeds target, yields fall

* Italian syndicated debt sale finds strong demand

* 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 dipped on Tuesday after the two countries saw solid demand at debt sales, but room for further falls looked limited with more bond auctions coming up.

Spain sold treasury bills of 5.75 billion euros, more than the 4.5-5.5 billion target, in another signal it can easily find buyers for its debt after a successful bond auction last week. Pricing for Italy's new 15-year syndicated bond also suggested strong demand, traders said.

But some analysts said a rise in yields at the start of the session suggested the market may be showing signs of having difficulties digesting the large amount of debt on offer at current yield levels, especially in Spain.

"We had a convincing auction of Spanish T-bills," said DZ Bank rate strategist Christian Lenk. "But sizes are rather large and maybe it has weighed a bit on Spanish debt already. I think they might become more cautious in the future and it will be hard to see ... overachieved (auction) targets."

Spanish 10-year bond yields were last 5 basis points lower on the day at 4.99 percent, having risen as high as 5.09 percent early in the session. They were still 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.

Some analysts say the rally may have gone too far. Rabobank rate strategist Lyn Graham-Taylor expects yields to gradually rise away from the 5 percent level as a heavy funding calendar is likely to eventually take its toll.

"Spain's next issuance (in 2013) is a really chunky figure," he said. "Supply, in our view of the world, will start to increase pressure on Spain and yields could start rising."

HEAVY ISSUANCE

Debt sales in Spain are coming thick and fast, with an auction of 3.5-4.5 billion euros of 2015, 2018 and 2041 bonds scheduled for Thursday.

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.

In Italy, orders for its 15-year bond excluding those from lead managers exceeded 8 billion euros, according to IFR, a Thomson Reuters news and market analysis service. It is the country's first sale of 15-year debt since September 2010.

Italian 10-year yields fell 2 bps to 4.17 percent after rising slightly earlier in the session.

"There is good demand for this syndicated Italian deal so I think that's why (yields are falling)," a trader said.

Bund futures rose 32 ticks to 143.09, 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.

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