EURO GOVT-Italian yields rise as market absorbs supply
* Pricing of Italian sale suggests good demand * Strong appetite at German 30-year bond auction * Outcome of Fed meeting in focus, little new expected By Ana Nicolaci da Costa LONDON, Jan 30 (Reuters) - Italian government bond yields rose across maturities on Wednesday as the market absorbed supply from an auction analysts said showed demand for longer-dated peripheral debt was improving. Italy paid less to borrow over five and 10 years than it had since October 2010 as investors seeking returns continued to take comfort from the promise of European Central Bank intervention and showed little concern about upcoming elections. The Treasury raised 6.5 billion euros, the top of its 4.5-6.5 billion euro target range, 3.5 billion euros of which was 10-year debt. Although the bid-cover of 1.3 was considered modest, the pricing suggested solid demand, analysts said. "What we've been seeing recently is increased demand particularly from overseas, for Italian bonds, not just the short end but particularly the longer end... I think today's auction provides further evidence that is indeed occurring," RIA Capital Markets bond strategist Nick Stamenkovic said. Rome paid a yield of 4.17 percent for the 10-year paper, down from 4.48 percent at the end-December sale and below 4.23 percent in the secondary market around the time of the auction. Ten-year yields were little changed after the results, up around 6 bps on the day. After the prospect of ECB intervention fuelled a rally in the short-dated paper which falls within the bond-buying plan's scope, analysts expect investors to shift towards longer-dated debt as they search for higher returns. "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," said Rainer Guntermann, strategist at Commerzbank. Against this backdrop, he recommended investors put on flattening trades on the Italian yield curve or make bets that longer-dated yields will fall faster than short-dated ones. Ten-year Spanish yields were 1.4 bps higher at 5.18 percent. Data showed Spain's economy sank deeper into recession in the fourth quarter of last year - a reminder of the challenges still facing the euro zone. GERMAN APPETITE The recent cheapening in German debt prices secured strong demand at a sale of 30-year Bunds, which also tend to be favoured by institutional investors needing to match long-term pension and insurance liabilities to secure assets. Germany sold 1.637 billion euros of 30-year debt at a yield of 2.45 percent, higher from 2.34 percent at the last such sale in October, attracting bids for 1.8 times the amount on offer. "The strong overbidding suggests that this was a good auction result and adds to the current view that the rally in peripherals is not a zero-sum game, i.e. largely not to the detriment of the core," said Rabobank strategist Lyn Graham-Taylor. In the secondary market, German bond prices were down on the day as the market absorbed the supply, with 30-year bond yields up 1.6 bps at 2.44 percent and the 10-year yield 2.7 bps higher at 1.72 percent. German Bund futures were 34 ticks lower on the day at 141.48, with technical charts pointing to further weakness. 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, Commerzbank's Guntermann added. "There seems to be a case for more weakness in Bunds. For today, we would prefer technical shorts in Bunds," he added. With the supply 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 a commitment to hold interest rates near zero until the unemployment rate falls to 6.5 percent, provided inflation does not threaten to breach 2.5 percent.
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