EURO GOVT-Bunds fall ahead of German, Italian sales
* Higher yields could attract demand at 30-year German sale
* Yield-hungry environment to benefit Italian auction
* Outcome of Fed meeting in focus, little new expected
By Ana Nicolaci da Costa
LONDON, Jan 30 (Reuters) - German Bund futures fell on Wednesday as investors made room for a sale of long-dated German paper and prepared for solid demand at an Italian debt auction.
Italy will offer up to 6.5 billion euros of bonds maturing in 2017 and 2022 in an auction expected to be well-received after improved sentiment towards lower-rated debt secured a stellar start to Italy and Spain's 2013 funding.
German Bund futures were 21 ticks lower on the day at 141.61, with technical charts pointing to further weakness.
"Given the still ongoing hunt for yield environment, we would expect more and more investors to be more open-minded also for longer maturities in the Italian curve," Rainer Guntermann, strategist at Commerzbank said.
Against this backdrop, he recommended investors put on flattening trades on the Italian yield curve, favouring longer-dated bonds expecting that their yields would fall faster than short-dated ones.
In the secondary market, 10-year Italian yields were flat at 4.16 percent and five-year yields were 1.4 bps lower at 2.97 percent.
Some traders flagged risk of indigestion in lower-rated debt markets after a bout of buying in recent months that triggered a sharp rally.
"(The auction) probably (goes) alright but I don't think it trades well afterwards," one trader said, referring to Italy.
Ten-year Spanish yields were 1.4 bps lower at 5.15 percent, even after data showed Spain's domestic gross product fell a slightly more than expected 1.8 percent in the fourth quarter from a year earlier, according to preliminary data.
The cheapening in German debt prices and rise in yields is likely to benefit a sale of 30-year German paper, which is also expected to benefit from bids from institutional investors who need to match long-term pension and insurance liabilities to secure assets.
But technical charts continue to paint a bearish picture for the Bund future, technical analysts said.
The Bund had broken a crucial support level at 141.71 - a 55-week moving average - while the 10-year yield has cleared key resistance at 1.7 percent, leaving the Bund vulnerable from a technical point of view, Guntermann added. It last stood up 2.2 bps at 1.71 percent.
"There seems to be a case for more weakness in Bunds. For today, we would prefer technical shorts in Bunds," he added.
After the supply is out of the way, investor attention will fall on the outcome of the Federal Reserve policy meeting which comes after the European market close.
The Fed is expected to maintain asset buying at $85 billion a month and retain the commitment to hold interest rates near zero percent until the unemployment rate falls to 6.5 percent, provided inflation does not threaten to breach 2.5 percent.
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