EURO GOVT-Spanish, Italian yields resume slide after supply wave
* Italian, Spanish yields dip as supply pressure eases
* Peripheral debt seen resuming rally
* Bunds find support in ECB easing expectations
By Marius Zaharia
LONDON, May 16 (Reuters) - Italian and Spanish bond yields fell on Thursday and were seen dropping further as supply pressure eased after the two countries sold large amounts of debt in syndicated deals earlier this week.
The two have taken turns at the forefront of the euro zone crisis in the past two years. But they have found some relief in debt markets this year as ultra-easy central bank policies around the world push investors towards higher-yielding assets.
Italy sold 6 billion euros worth of 30-year bonds on Wednesday, its first ultra-long debt sale since 2009. On Tuesday, Spain sold a greater-than-expected 7 billion euros of 10-year bonds.
Portugal and Slovenia also issued bonds via syndication deals earlier this month.
The Italian and Spanish sales confirmed last week's market rumours of their plans for syndicated deals that had pushed their benchmarks yields up about 20 basis points in the last few sessions.
"For Italy and Spain, supply has been a factor behind the recent rebound in yields," said Jan von Gerich, fixed income chief analyst at Nordea in Helsinki.
"But the market is still interested in taking carry positions. The downtrend (in yields) has not run its course. I think (Italian and Spanish) yields will hit new lows ... in the next couple of weeks."
Italian 10-year yields were 11 basis points lower on the day at 3.94 percent, while equivalent Spanish yields fell 10 bps to 4.27 percent. Earlier in May, they hit 2-1/2 year lows of 3.68 and 3.95 percent, respectively.
With yields having already dropped far from the euro zone crisis highs of above 7 percent, the pace of the rally is expected to slow down considerably.
"Spreads from this point onwards will diminish only at a slow pace," said Sergio Capaldi, fixed income strategist at Intesa SanPaolo in Milan.
The Italian/German 10-year yield spread stood at 257 bps.
"The market is recovering, but ... 200 basis points for (the Italian/German spread) is something we could see only at the end of the year," said Capaldi.
German Bunds edged up as the recent data stream out of the euro zone reinforced expectations that the European Central Bank will ease policy further.
The euro zone economy contracted by 0.2 percent in the first quarter, data showed on Wednesday. Earlier in the session, final inflation figures for April confirmed a preliminary estimate of 1.2 percent year-on-year.
Bund futures were 10 ticks higher at 144.74.
"I expect Bunds to see a rebound ... The door was open for renewed pricing of negative (ECB deposit) interest rates. I'm not saying that's going to happen, but at some point the market will price it in," von Gerich said.