EURO GOVT-Bunds rally on healthy auction, dovish Fed comments
* New 10-yr bond attracts more demand than 2013 average
* Fed comments dampen speculation of early QE exit
* Bernanke testimony, Fed minutes in focus
LONDON, May 22 (Reuters) - Bunds rose on Wednesday as a sale of new 10-year bonds attracted above average demand and after dovish comments from Federal Reserve officials dampened speculation about an early exit from easy U.S. rate policy.
An auction of German debt attracted 1.6 times the amount on offer, above a 1.47 average for sales of similar paper this year and underpinning a rally in German Bunds. The recent pick-up in yield likely boosted appetite.
Investors now turn to a testimony by Fed Chairman Ben Bernanke and minutes from the Fed's last policy meeting to gauge the central bank's thinking on its monetary policy.
Fed officials recently played down chances that the U.S. central bank would signal a readiness to reduce its bond buying at its meeting next month.
The latest message came from New York Fed President William Dudley who told Bloomberg TV it was too soon to determine whether to dial down the program, and the economic picture may not be clear enough to make that decision for another three or four months.
"It was a reasonable enough auction," Marc Ostwald, strategist at Monument Securities said of the German debt sale.
"You have got a combination of the fact that we have backed yields up somewhat from the lows and the fact that we are now getting less pessimistic on the prospect of tapering (U.S. bond purchases)."
German Bund futures were 48 ticks higher on the day at 144.81 pushing 10-year German yields 4.1 basis points lower to 1.37 percent.
German borrowing costs over ten years hit their highest in nearly two months at 1.42 percent last week and technical analysts say they are facing resistance at 1.38-1.42 percent.
The average yield at the auction was 1.41 percent, up from 1.28 percent at a similar sale in April but not very different from this year's average of 1.43 percent.
"Near-term we recommend buying the Bund. Whatever your view on the periphery, it makes sense to keep part of your portfolio on core markets and at the moment the Bund is relatively attractive," Patrick Jacq, European rate strategist at BNP Paribas.
Among the periphery, he preferred Italy to Spain, saying Italy's debt pile was its main problem and was becoming more manageable to tackle thanks to falling funding costs.
Ten-year Italian government bond yields were 1.3 basis pints lower at 3.93 percent while the Spanish equivalent was flat at 4.20 percent.
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