By Emelia Sithole-Matarise
LONDON Jan 30 (Reuters) - Italian bond yields held steady on Thursday before a debt auction which was expected to go smoothly as large bond repayments were likely to be reinvested into the market.
Italy offers up to 8.5 billion euro in debt, including a new five-year bond later in the day, at a sale seen supported by a 14.5 billion repayment of a zero-coupon bond due on Friday.
The euro zone's higher-yielding bonds, apart from junk-rated Greek and to a lesser extent Portuguese paper, have been largely resilient to the pull-back in riskier assets triggered by the turmoil in emerging market currencies.
Expectations that the European Central Bank could ease monetary policy further in the face of prolonged low inflation and large coupon and debt repayments have propped up the bonds.
Italian 10-year yields were last unchanged on the day at 3.86 percent, showing little of the price weakness that normally precedes a debt sale as traders make way on their books for the new supply.
"The little give-back yesterday evening might be enough of a (price) concession. I'm not sure I see another huge move going into the auctions," said Lyn Graham-Taylor, a strategist at Rabobank.
"The amount of redemptions coming up on Friday from Italy are pretty chunky so I can't see too much of a problem for them getting this away."
Italian and other peripheral euro zone issuers have taken advantage of benign market conditions and hefty coupon and bond repayments in January to front-load their 2014 debt sales.
The large amounts of supply hitting the market are, however, raising concern about indigestion that some analysts say could reverse the sharp rally in higher-yielding bonds.
Last week, Spain issued 10 billion euros ($13.6 billion) of a new 10-year bond on Wednesday, drawing demand of almost 40 billion - a record for European governments. It has sold above-target amounts of bonds in the first three weeks of 2013.
Spanish and Italian yields have this week retreated from multi-year lows on the back of the supply glut with the souring note in riskier assets also prompting some profit-taking.
Spanish 10-year yields were last 1.4 bps up on the day at 3.72 percent.
Elsewhere in the market, German 10-year yields were down by a similar amount at 1.63 percent as renewed strains in emerging markets after weak Chinese manufacturing data and the Federal Reserve scaling back its monetary stimulus spurred investors to buy low-risk bonds.
An important gauge of Chinese manufacturing slipped to a six-month low for January prompting investors already nervous about a fragile global economic recovery to cut exposure to riskier assets.
"China's PMI was a bit softer and, combined with the fun and games we had yesterday in emerging markets, risk traded heavily overnight. The (Bund) market doesn't feel particularly long so presumably things are going to remain well supported," a trader said.