Spanish yields bounce off six-month lows as ECB doubts grow
* Investors make room for Spanish debt supply
* Uncertainty high over next ECB policy move
* Strong early bidding for BTP Italia bond
By Marius Zaharia
LONDON, Nov 5 (Reuters) - Spanish bond yields bounced off six-month lows on Tuesday, as investors shuffled portfolios before a debt sale in a market hit by uncertainty over whether the European Central Bank would flag further monetary easing.
Spanish 10-year yields rose 8 basis points to 4.10 percent, underperforming other euro zone debt, having hit a six-month low of 3.96 percent on Monday after Fitch upgraded its outlook for the country's credit ratings.
German Bund yields rose 2 bps to 1.71 percent, Italian 10-year yields were 5 bps higher at 4.16 percent, while French, Austrian and Belgian also rose.
"The fact that we are seeing Bunds soften, peripherals underperform and equities weaken smacks of the market perhaps reassessing whether it has got ahead of itself in terms of expecting a near term policy response from the ECB," Rabobank senior rate strategist Richard McGuire said.
Spanish bonds rose on Monday after the Fitch revision. But on Tuesday, investors were making room for the 3-4 billion euros of 2018, 2023 and 2026 bonds on offer on Thursday.
"Investors are demanding a bit of concession ahead of supply, but the sentiment on Spain remains upbeat and this week's auctions would not be a major hurdle for them," said Nick Stamenkovic, bond strategist at RIA Capital Markets.
If the ECB were to ease monetary policy further, he would recommend investors increase positions in Spain, he said. A low-rate environment would push investors to seek returns in riskier assets, supporting lower-rated debt.
But Citi fixed income strategist Nishay Patel recommended taking profits on long positions in Spanish April 2015 bonds as, among other reasons, those who expect the ECB to cut rates this year might be disappointed on Thursday.
A sharp drop in inflation last week prompted speculation the ECB could flag further easing on Thursday, either through hints at a 25 bps cut in the refinancing rate to 0.25 percent or at another offering of unlimited long-term loans to banks.
That pushed euro zone bonds higher last week, but they gave up some ground on Tuesday, with traders blaming the latest polls predicting the ECB will hold fire. All but one of 23 traders polled by Reuters see no November cut.
One trader said a rate cut would have a negligible impact on the euro zone anyway so the market reaction to such a move, while positive, would probably be muted.
Italy opened the books for a new "BTP Italia" inflation-linked bond on Tuesday in a bid to tap wealthy households to finance its 2 trillion euro debt burden.
Orders topped 5 billion euros in the first 90 minutes , prompting expectations the four-day offering could be closed early. A strong sale could be a catalyst for a near-term rally in Italian bonds, all else being equal.
"With 15 billion euros, for instance, they will be able to reduce the size of the auctions significantly for the rest of the year," UniCredit rate strategist Luca Cazzulani said.
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