EURO GOVT-German debt holds firm after strong auction
* 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 and Marius Zaharia 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. The demand for an auction of new 10-year paper, an asset perceived as a safe haven, indicated room for German yields to rise was limited in the near term. 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. Bund futures were one tick higher on the day at 143.30, having already clocked up gains of more than a full point since Friday's close. Ten-year cash yields were flat at 1.50 percent. "Germany had a decent auction today, showing that people are relatively happy to buy Bunds when they get at 1.50-1.60 (percent levels in yields), one trader said. "There are opportunistic buyers, people who have to hold Bunds in a certain portion of the portfolio. But there's also a feeling in the back of people's minds that some of the stresses in Europe may come back at some point." A post-auction rise in Bund futures up to 143.64 was erased by better-than-expected earnings by some U.S. banks, which dented appetite for low-yielding assets, another trader said. Bunds and lower-rated debt have moved in tandem on several occasions this year, as investors - encouraged by the safety net offered by the European Central Bank's bond-buying programme - sprayed cash across the whole euro credit spectrum. 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. After a strongly subscribed 15-year bond syndication on Tuesday, Italy said it could issue its first 30-year bond in more than three years in 2013. Spanish 10-year bond yields were 2 basis points higher at 5.05 percent while the Italian equivalent was 2 bps lower at 4.18 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. Portugal sold all 2.5 billion euros of Treasury bills on offer on Wednesday and yields fell sharply, increasing chances the bailed-out country will stage a successful return to the longer-term bond market this year.
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