EURO GOVT-Higher yields lure investors back to Bunds

Tue Jan 15, 2013 12:42pm EST

Related Topics

* Perkier appetite for Bunds to help German 10-year sale

* Fitch warning on Spain ratings overshadows bill sale

* Spanish yields may have fallen too far -- analysts

By Emelia Sithole-Matarise

LONDON, Jan 15 (Reuters) - Bund prices rose on Tuesday with higher yields luring investors back into the euro zone's most liquid bonds after their recent sell-off, auguring well for a German debt sale on Wednesday.

A warning by Fitch that Spain's ratings could still be cut even if it avoided seeking a bailout overshadowed a successful bill sale by Madrid and reversed a fall in Spanish yields, aiding the rebound in Bunds.

The Bund future jumped 52 ticks on the day to settle at 143.29, lifting further off a six-week low of 142.05 hit last week.

"Bunds sold off quite aggressively in the first week and a half and yields backed up a lot so now people are coming back and we're retracing," a trader said.

Bund yields dipped 4.4 basis points to 1.51 percent. They were seen likely to fall further with Germany widely expected to draw good demand at a sale of 10-year bonds on Wednesday, helped by rising concern about looming tough U.S. talks on raising its debt ceiling.

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Among higher-yielding euro zone bonds, Spanish and Italian yields reversed earlier falls after Fitch said Spain would still face rating downgrade risks even if it avoided having to ask for aid.

"There's a little bit of risk-off occurring. We've seen some comments coming from Fitch about Spain and their rating and how that's still in danger," said David Keeble, global head of fixed income strategy at Credit Agricole.

Spanish 10-year yields were last flat on the day at 5.03 percent, having fallen to 4.99 percent earlier after Madrid sold 5.75 billion euros of treasury bills, above its initial target and meeting solid demand

Italian yields were up 4 bps at 4.23 percent, bouncing off the day's low of 4.14 percent hit on strong demand for a 15-year bond sold via syndication.

Some analysts said further falls in Spanish yields might be limited with more bond auctions due on Thursday and signs that the market could be struggling to digest 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 ... over achieved (auction) targets."

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

Other analysts say the rally may have gone too far. Rabobank rate strategist Lyn Graham-Taylor expected yields to gradually rise away from the 5 percent level as a heavy funding calendar was 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."

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.

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