Growth, ECB outlook fuel demand for Spain, Portugal debt

Thu Jan 9, 2014 8:17am EST

Related Topics

* Spain sells above-target 5.3 billion euros of bonds

* Interest for Portuguese debt offer tops 9 billion euros

* Lisbon seeks to confirm market access before bailout exit

* ECB's ultra-easy stance supports demand for periphery debt

By Emelia Sithole-Matarise

LONDON, Jan 9 (Reuters) - Investors snapped up Spanish bonds at Madrid's first 2014 sale on Thursday and showed strong interest in an offering of Portuguese debt as an improved economic outlook fed demand for higher-yielding euro zone bonds.

Some investors question how sustainable falling peripheral yields will be after 18 months of declines since a pledge of European Central Bank support. But such concerns, notably over ratings and liquidity, seemed muted among buyers this week.

Spain's 10-year yields fell to their lowest in four years on Thursday after it sold an above-target 5.3 billion euros of five- and 15-year bonds.

Madrid is hoping to capitalise on improved investor sentiment towards countries on the euro zone's periphery as it kicks off a busy funding programme this year.

Junk-rated Portugal is taking advantage of benign market conditions and a fall in its yields to sell five-year bonds via a syndicate of banks as it tests its ability to tap markets before giving up its international bailout support this year.

Investor interest in the bond was almost five times the 2.0-2.5 billion euros Lisbon was expected to raise, according to the issue's lead manager. Portuguese 10-year bond yields fell to near seven-month lows.

The sales follow strong demand on Tuesday for Ireland's first bond sale since it exited its EU/IMF bailout in December and are further confirmation of investor appetite for higher-yielding euro zone debt as the region's economy shows signs of picking up.

Expectations that the European Central Bank will keep interest rates low for a long period, or even cut them further, to support recovery have supported demand not only for the periphery but also higher-rated issuers such as France, whose 2014 debt sales got off to a solid start.

The ECB held its main interest rate at a record low 0.25 percent at its meeting on Thursday. It is expected to reiterate its readiness to ease if inflation stays far below its target or money market conditions tighten too much.

"The Spanish auction was solid and we are seeing the bonds continuing to rally and for Portugal it's a similar story - the sale seems to be going very well. Sentiment is very, very positive for the periphery," said Michael Leister, a senior interest rate strategist at Commerzbank.

"We believe it's going to continue but ... the momentum is going to slow down eventually with supply picking up and also investors will be keen to book some profits after this aggressive rally."

Spanish 10-year yields were down five basis points at 3.75 percent, having fallen almost 50 basis points this year to four-year lows, while five-year yields were nine bps lower at 2.26 percent, the lowest since at least 2009.

Portuguese 10-year yields were three basis points lower at 5.40 percent, extending their 70 bps decline so far this year while five-year yields were steady on the day at 4.11 percent.

PORTUGUESE RATINGS EYED

Investor appetite for Portuguese bonds has also perked up on bets that rating agencies could lift the country's credit standing out of its junk status.

Moody's is due to announce its review for Portugal on Friday while Standard & Poor's will give its decision next week under new EU-regulated scheduled ratings announcements.

"We expect good news," said Societe Generale strategist Ciaran O'Hagan of the pending review, adding that Thursday's solid issue would help. "A successful tap will prove to the rating agencies that Portugal is back in the game," he said.

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

Some investors, however, worry the market is not liquid enough and credit ratings high enough to extend the rise in prices that started when ECB head Mario Draghi said in July 2012 he would do whatever it took to protect the euro.

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