Spanish yields bounce off 8-year lows before debt sale

LONDON Thu Feb 20, 2014 3:29am EST

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LONDON Feb 20 (Reuters) - Spanish bond yields bounced off eight-year lows on Thursday as dealers made room for another chunky debt sale by Madrid, which is trying to capitalise on improved growth expectations to frontload its bond issuance.

A pick-up in economic growth is key for Spain's goals of keeping its budget deficit in check and curbing public debt.

The improved sentiment this year has helped Madrid to shift more than a fifth of its 2014 bond issuance plan already, setting the pace for the regular euro zone issuers.

A shift in investor perceptions could come from the euro zone PMI business surveys due in the run-up to the 4-5 billion euros (5.5-$6.9 billion) auction of five-, 10- and 30-year bonds.

French manufacturing and services PMIs came below expectations. German and regional sentiment surveys are due later.

"Sentiment towards peripherals has been quite good so there shouldn't be any problems at the auctions," said Jan von Gerich, chief fixed income analyst at Nordea.

The PMI data could "distort the bidding process" but the vast amount of bonds already issued by Spain "should build confidence."

"They have more freedom to slow down issuance later in the year if sentiment turns again," he added.

Ten-year Spanish yields were 2 basis points up on the day at 3.58 percent, up form eight-year lows of 3.499 percent hit early on Wednesday.

Equivalent Italian yields were also slightly off eight-year lows of 3.54 percent hit in the previous session as markets showed faith in Prime Minister-designate Matteo Renzi's ambitious reform agenda.

"There's been a bit of selling in the periphery, but it's related to the Spanish supply, nothing more sinister than that," one trader said.

Expectations that the European Central Bank may ease its monetary policy further due to low inflation have also directed flows towards lower-rated bonds such as Spain's and Italy's as investors search for higher yields.

German 10-year Bund yields, the benchmark for euro zone borrowing costs, fell 1 basis point to 1.65 percent on the back of the weak French PMI data.

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