Spanish yields hit 4-year lows, 2014 issuance seen comfortable

Wed Jan 8, 2014 1:16pm EST

Related Topics

* Spanish yields hit new four-year lows

* Spanish bond shrug off plans for higher 2014 issuance

* Irish yields near eight-year troughs

* Rally fuelled by growth expectations, strong Irish sale

By Emelia Sithole-Matarise and Marius Zaharia

LONDON, Jan 8 (Reuters) - Spanish bond yields hit new four-year lows on Wednesday with investors optimistic the country's planned 2014 issuance would easily be absorbed as economic growth picks up.

Madrid said it planned to sell 133.3 billion euros in medium- and long-term bonds this year, up from 128.4 billion in 2013. The figure was broadly in line with some analysts' forecasts and many in the market saw few hurdles for the sales with a brighter economic outlook underpinning demand.

Data this year has shown Spain's economy recovering. Its services sector grew at its fastest in more than six years in December and the number unemployed fell by 2.24 percent.

Indicators elsewhere have also been positive, and expectations that the European Central Bank will keep interest rates low for a long period or even cut them further, have supported high-yielding euro zone.

Strong demand on Tuesday for Ireland's first bond sale since it exited its EU/IMF bailout also boded well for Madrid's issuance strategy.

"The market was well prepared and very much expecting that we will see a mild increase in gross supply from Spain driven by higher redemptions but ... the important thing is they explicitly said they want to term out their debt even more," said Commerzbank strategist David Schnautz.

"The economic recovery which is taking place and is gaining traction creates a very solid backdrop for these types of credits with Spain performing better than Italy."

Spanish 10-year bond yields fell 3 basis points to 3.745 percent - their lowest since late 2009 and outperforming Italian equivalents which were 2 bps up at 3.89 percent.

Spanish yields have fallen almost 40 bps this year.

Notably for some analysts, the debt sales target had increased because of a rise in debt repayments rather than a higher budget deficit, which is expected to fall. Plans to issue inflation-linked debt were also expected to ease the supply pressure on its conventional bonds.

"Spain would be a welcome new entrant into the euro inflation-linked bond market. It would enable Spain to diversify its investor base," said Citi strategist Nishay Patel, who expects Spain to issue about 5 billion euros in inflation-linked debt this year.

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Annalisa Piazza, a strategist at Newedge, expected Spain to try to sell more debt early in 2014, as it has in recent years, as investors look to reinvest about 15 billion euros in redemptions this month.

Madrid plans to sell up to 5 billion euros in bonds on Thursday, which would be the largest sale in almost a year, while Portugal plans to sell a five-year bond via a syndicate of banks after Ireland sold 3.75 billion euros of 10-year bonds on Tuesday.

Confidence in most euro zone states' ability to easily fund themselves in secondary markets this year is in sharp contrast to recent years, when soaring yields risked shutting Italy and Spain - the euro zone's third and fourth largest economies - out of markets.

Some analysts warn investors may demand higher yields if a large volume of peripheral debt hits the market in short order.

Elsewhere, Irish 10-year yields dropped 1 bp to 3.27 percent, just shy of Tuesday's eight-year low of 3.26 percent.

Yields on top-rated German Bunds, the euro zone's benchmark, were up 2 bps at 1.90 percent after an upbeat report on the U.S. private labour market signaled faster U.S. economic growth.

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