Spanish yields ease back towards 8-yr low before debt sale

LONDON Wed Jan 22, 2014 4:08am EST

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LONDON Jan 22 (Reuters) - Spanish yields dipped back towards eight-year lows on Wednesday as Madrid launched a new 10-year bond which is expected to meet solid demand with large coupon and debt repayments likely to be reinvested into the market.

Madrid, which has set up a brisk pace to meet its 2014 funding programme, has tasked a syndicate of banks to sell an April 30, 2024 bond, a banker close to the sale told IFR Markets, a Thomson Reuters financial service.

With improved demand for higher-yielding euro zone bonds spurred by a brighter growth outlook, more positive ratings reviews and hefty bond repayments, it has been selling bonds every week since the start of the year.

The syndicated sale comes after an auction of 5.9 billion euros of 2017, 2026 and 2028 debt last week. Spain plans to sell 133.3 billion euros in medium- and long-term bonds this year, up from 128.4 billion last year.

Spanish coupon and debt repayments worth 12 billion euros due in coming days are expected to support demand for bonds. Some in the market, however, say if the current pace of sales is maintained next month when bond supply is expected to surpass repayments, this could see a bit of reversal in the rally.

"With the current environment of still strong support for the periphery we don't see much concession (in price) built into the secondary market," said ING strategist Alessandro Giansanti.

"The market is positioning for positive growth and the data coming out from Spain, the lead indicators, point to a boost in growth in 2014 ... The upcoming coupon payments and redemptions will benefit Spain, but in February there's a risk of wider spreads as there will be less repayments."

Spanish 10-year yields fell 2 basis points to 3.72 percent, just above an eight-year low of 3.65 percent on Monday. Yields on other lower-rated euro zone bonds were slightly lower.

The yields retreated off the eight-year lows on Tuesday as speculation Madrid was planning to launch a new 10-year bond prompted some portfolio adjustments. But analysts say the limited rise signals resilience in demand for the bonds.

SUPPORTIVE ECB OUTLOOK

"Despite having already fulfilled 9 percent of this year's targeted bond issuance with a marked amount of ultra-long SPGBs finding healthy demand, we expect an issuance volume of 6-7 billion euros today," Commerzbank strategists said in a note.

Previous sale amounts of new 10-year Spanish bonds were around of 5 billion and 7 billion euros in 2010 and last year.

Germany is also due to sell up to 4 billion euros of two-year paper in an auction seen supported by expectations that the European Central Bank may loosen policy further.

Two-year yields were steady at 0.17 percent, having retested six-week lows around 0.63 percent on Tuesday on the ECB outlook and bets that short-term money market rates will retreat from recent peaks.

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