CORRECTED-EURO GOVT-German debt prices steady, auction draws good demand

Wed Jan 16, 2013 9:35am EST

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(Corrects name of analyst in fourth paragraph)
    * Bund demand solid after well-bid 10-year auction
    * Higher yields tempt investors back into core debt
    * Periphery rally stalled by weight of new bond supply

    By William James
    LONDON, Jan 16 (Reuters) - Appetite for German debt held
firm on Wednesday as yields near the top end of their recent
range kept buyers interested, helping Bund futures retain this
week's sizeable gains.
    Bund futures were unchanged at 143.29 having already clocked
up gains of more than a full point since Friday's close and
demand for an auction of new 10-year paper saw investors bid in
greater size than the historical average. 
    The 4 billion euro sale of a bond maturing in February 2023
 drew bids worth 1.7 times the amount on offer,
compared with 1.5 at a similar sale in November and an average
of 1.39 in 2012. 
    "The recent selloff and steepening of the curve left the new
paper at relatively attractive levels," said Annalisa Piazza,
market economist at Newedge in London.
    "Uncertainties about the economic outlook and political
risks continue to loom and today's auction results are a sign
that market dealers still see some value in core EMU debt."
    The new issue traded at around 1.57 percent
in the grey market, where bonds are bought and sold before they
are issued. That compared favourably to the current 10-year
benchmark which last yielded 1.50 percent.
    German bond prices have recovered around a third of the big
fall seen at the start of the year when relief over a U.S.
fiscal deal prompted greater risk taking. Worries about the next
leg of the U.S. budget debate - a battle to raise the country's
debt limit - have resurfaced, lending support to safe havens.
    The technical outlook for German debt was less positive with
analysts not convinced that the rise seen this week marked a new
upward trend for Bund futures.
    "As impressive as this move has been, there is still no
evidence of any bullish reversal patterns forming," said Richard
Adcock, technical analyst at UBS.
    "While the rally can be extended further over the short
term, our main resistance focus is the 38 percent retracement of
the late December/early January selloff at 143.49 and we will
watch how this is defended over the coming days."
    
    SUPPLY STALLS PERIPHERY
    Yields inched higher among the euro zone's lower-rated
sovereigns, where a busy start to 2013 in terms of new debt
issuance has stalled a new year rally.
    Spain is due to issue up to 4.5 billion euros of bonds on
Thursday. That will be a closely watched sale as investors try
to gauge whether the country can make it through the year
without turning to international lenders for help.
    Spanish 10-year bond yields were 2 basis points higher at
5.05 percent while the Italian equivalent was up
1.5 basis points at 4.22 percent.
    "It's not really surprising that markets are looking for a
bit of a concession ahead of the Spanish auction tomorrow and
obviously we've had the auction in Italy which led to a bit of
caution," said Nick Stamenkovic, strategist at RIA Capital
markets.
    Italy continued its flying start to fundraising in 2013 with
a strongly subscribed 15-year bond syndication on Tuesday that
took its overall amount raised to close to 10 percent of this
year's target. 
     Portugal sold all 2.5 billion euros of Treasury bills on
offer on Wednesday and yields fell sharply, lifting chances the
bailed-out country will stage a successful return to the
longer-term bond market this year. 

 (Editing by Susan Fenton)
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