EURO GOVT-Bunds at 3-week low as investors seek higher yield

Tue May 7, 2013 12:27pm EDT

Related Topics

* 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 Emelia Sithole-Matarise and Marius Zaharia

LONDON, May 7 (Reuters) - German Bund futures fell to a three-week low on Tuesday while Italian and Spanish bond prices advanced on Tuesday as loose monetary policy by the world's major central banks fanned demand for higher-yielding assets.

Portugal's debt lagged other peripheral euro zone bonds as investors made room for its first 10-year issue since its bailout. The country's debt agency said the issue drew strong interest from foreign investors.

The sale dented demand for low-risk Bunds but was expected to spur a rally in peripheral euro zone debt and Portugal's yields were tipped to resume falling soon.

Bunds extended falls triggered on Friday by a better than expected U.S. non-farm payrolls report, offsetting comments by the European Central Bank President Mario Draghi that the central bank was ready for a negative deposit rate.

"Risk assets are being generally supported by central bank policies. There could be a rotation in portfolios but the Bund selloff was prompted by the non-farm payrolls," said Harvinder Sian, a strategist at RBS.

"The interpretation of that data is overdone and ultimately the selloff is a buying oportunity so I wouldn't expect the Bund to go too far from where we are today."

Bund futures settled 73 ticks down on the day at 145.66, continuing a retreat from record highs of 147.20 hit last week, after the ECB cut its key rate to 0.50 percent and signalled it was ready to do more.

Cash 10-year German yields 5 basis points higher at 1.297 percent.

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 Draghi in comments made on Monday - is likely to keep Bund yields anchored at low levels.

EYEING BAILOUT EXIT

Spanish and Italian 10-year yields dropped 3-6 basis points to 4.08 and 3.80 percent, respectively.

Highlighting the strong investor appetite for higher returns, European books alone for Portugal's syndicated bond sale closed at 9 billion euros with bidders looking for a yield of 5.6 percent. Portugal was hoping to raise 3 billion euros from the sale.

"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 3 basis points higher on the day at 5.55 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".

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