EURO GOVT-Portuguese yields edge up on landmark bond sale

Tue May 7, 2013 7:09am EDT

* Hunt for yield resumes in lower-rated debt markets

* Portugal poised to sell 1st 10-year bond since bailout

* Bund futures continue retreat from record highs

By Marius Zaharia

LONDON, May 7 (Reuters) - Portugal's debt lagged other euro zone bonds on Tuesday as investors made room for its first 10-year issue since its bailout, highlighting strong demand for lower-rated euro zone debt.

Portugal was looking to raise 3 billion euros in the syndicated deal at a yield around 5.6 percent.

The sale was expected to fan a rally in debt from the region's periphery, supported by easing measures taken by the world's largest central banks, and Portugal's yields were tipped to resume falling soon.

"It looks like a pretty good deal," said Annalisa Piazza, market economist at Newedge. "The general sentiment in the periphery has given support to Portugal. It is another step ... (towards) getting out of the euro zone debt crisis."

Portuguese 10-year yields were last 5 basis points higher on the day at 5.57 percent. Early in 2012, when investors believed Portugal would follow Greece and restructure its debt, the 10-year yield topped 17 percent.

Piazza said Portuguese yields could resume falling after the market digested the new supply, but did not expect a major rally as peripheral yields have already reached levels that "price in a very favourable scenario for the peripheral economies."

Spanish and Italian 10-year yields dropped 3-5 basis points to 4.08 and 3.82 percent, respectively.

German Bund futures fell half a point to 145.66, continuing a retreat from record highs of 147.20 hit last week, after the European Central Bank cut its key rate to 0.50 percent and signalled it was ready to do more.

Cash 10-year German yields were 4 basis points higher at 1.29 percent.

Traders pointed to good demand in Portugal denting demand for low-risk assets, and also to some investors who used a 1.2 billion euro sale in Austria as an opportunity to sell Bunds and switch into higher-yielding top-rated paper.

Bund futures fell by about a point on Friday after a better-than-expected U.S. nonfarm payrolls report raised expectations that the economic recovery in the United States was regaining momentum.

Analysts and traders said the current retreat is likely to be only temporary, as the possibility that the ECB may ease policy further - reinforced by ECB President Mario Draghi in comments made on Monday - is likely to keep Bund yields anchored at low levels.

"I'm pretty sure people will be buying this dip (in prices) soon," another trader said.

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