EURO GOVT-Italian yields fall as investors seek returns
* Germany to sell 4 billion euro of 10-year debt
* Auction seen going well on ECB rate cut bets
* Italian yields fall after solid retail bond sale
By Emelia Sithole-Matarise
LONDON, April 17 (Reuters) - Italian bonds rose on Wednesday, extending the previous day's gains after a bumper retail bond sale, highlighting a hunt for higher returns as monetary easing by global central banks depresses yields on low-risk debt.
Italian bonds outperformed Bunds - the euro zone's lowest-risk debt - after a sale of inflation-linked bonds targeted at wealthy domestic investors on Tuesday raised 17 billion euros, beating the Treasury's predictions of just under 10 billion euros.
Focus turned to Germany's auction of 4 billion euros of 10-year debt, which analysts expect to be well received despite low yields, supported by investor expectations that the European Central Bank will cut interest rates in coming months.
Anticipation that the euro zone's safe-haven debt will also benefit from potential Japanese investors switching out of their ultra-low yielding domestic bonds into foreign debt offering relatively higher returns was also expected to bolster demand for Bunds.
At 1.3 percent, German 10-year Bunds offer a yield pick-up over their Japanese equivalents whose yields slid to record lows of 0.6 percent after the Bank of Japan unveiled huge stimulus measures earlier this month.
The German Bund future was down 23 ticks at 145.50 as traders pushed for lower prices before the sale.
"There's some concession before the auction but we also saw a lack of support coming from the U.S. yesterday after (better-than-expected factory) data," said Patrick Jacq, a strategist at BNP Paribas.
"When the Bund was around 1.20 percent last week this was very expensive, especially versus other markets, and since we have seen a decline in volatility in peripherals. So we were expecting a pullback to the 1.30 percent area."
GRADUAL JAPANESE FLOWS
German 10-year yields are near troughs seen last year, when a euro zone break-up was considered by many as a realistic possibility, and right before the European Central Bank vowed to protect the euro.
Expectations of further monetary easing from major central banks and trust in the ECB's as yet untested pledge to buy bonds of struggling euro zone issuers if requested has underpinned demand for the region's higher yielding debt.
Italian 10-year yields were 6.5 basis points lower at 4.25 percent with Spanish equivalents 6 bps down at 4.68 percent.
Although market participants said they were seeing no flows from Japan, the expectation that Japanese investors will look abroad for higher returns was helping keep euro zone yields low.
"We have had limited evidence of Japanese investors switching into the euro zone so far. But it's the start of the (Japanese) fiscal year and the impact of the BOJ policy is likely to be gradual," a trader said.
"We expect the Japanese will have to buy debt other than JGBs as BOJ policy means that near term it's weakening the yen, and Japanese inflation may push higher as well so it makes sense to be invested in other currencies."
Slovenia's struggle to avoid becoming the euro zone's next bailout candidate will also be in the spotlight as it auctions 500 million euros of 18-month treasury bills and then try to buy back 855 million euros of the bills coming due at a small discount.