EURO GOVT-Bunds fall as investors brace for healthy Spanish sale
* Bunds fall right before auction
* Spanish sale expected to see strong demand
* Appetite for long-dated bond considered important
LONDON, Jan 17 (Reuters) - German Bund futures fell on Thursday as traders expected strong demand at a Spanish bond sale seen as a gauge of the country's ability to raise funds while avoiding a sovereign bailout this year.
Spain plans to raise up to 4.5 billion euros in bonds due to mature in 2015, 2018 and 2041.
Analysts expected healthy demand as sentiment towards riskier debt has improved thanks to abundant liquidity at the start of the new year and a European Central Bank's promise, made in 2012, to buy bonds of struggling sovereigns that seek help.
Spain's tough 2013 funding programme got off to a good start in an auction last week when it sold more than its target amount, while Italy made the most of lower borrowing costs by front-loading this year's issuance with a successful 15-year bond auction.
If it raises the maximum targeted amount on Thursday, it will have completed almost 9 percent of its 2013 medium- and long-term funding plan.
"Today is all about supply," one trader said. "I think it will be fine. There is appetite for risk out there. I can't see what the rationale is other than money being put to work."
German Bund futures were 31 ticks lower on the day at 143.06, reversing early gains, as traders grew optimistic the Spanish auction would go well.
Spanish bonds were higher across the curve, with the 10-year yield 3.4 basis points lower at 5.03 percent and the five-year yield 3.2 bps lower at 3.54 percent.
"It's just decent demand for peripherals. Spanish and Italian bonds are doing well after the strong auctions this week. The Spanish also looks like it's going to go well. The bonds are trading well ahead of the supply," a second trader said.
Analysts expected Spanish issuance to be skewed towards the shorter-dated maturities that fall within the scope of promised European Central Bank intervention.
The real test of sentiment will be demand for the 2041 bond, they say, especially as market participants would like Spain to issue a new 10-year bond to plug a gap in its yield curve.
"For Spain it's critical to be able to issue on the long sector, so today is a clear test for that," Patrick Jacq, European rate strategist at BNP Paribas, said.
Italian debt prices also rose two days after a healthy bond auction, with 10-year yields down 5.5 bps at 4.15 percent and five year-yields 3.7 bps lower at 2.83 percent.
Italy sold 6 billion euros of its first 15-year bond in more than two years on Tuesday, meaning it has raised nearly 10 percent of its 2013 funding needs.
A sale of French bonds was also expected to meet decent demand as they offer higher yields than debt issued by safe-haven counterpart Germany. France sells up to 8 billion euros of debt maturing in 2015, 2017 and 2018 later on Thursday.
Appetite has been strong for both the least risky and lower-rated bonds at auctions this year -- a phenomenon investors ascribe to ample liquidity as investors allocate funds at the start of the year and to an overhang from major central banks' ultra-loose monetary policy.
To play on this trend, while not taking too much risk, Rabobank recommends buying Belgian debt and selling Dutch, according to Elwin de Groot, senior market economist at Rabobank.
"It's not a long-term position but it's more the idea that in the near-term there is such a huge amount of liquidity," he added.
Ten-year Belgian bonds yielded 2.21 percent, compared to 1.71 percent on the equivalent Dutch bond .
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