Italy yields hover near record lows as debt sale eyed

LONDON Wed May 14, 2014 3:55am EDT

LONDON May 14 (Reuters) - Italian yields held near record lows on Wednesday before the sale of a longer-dated bond in Rome that is expected to fare well as anticipation of fresh European Central Bank stimulus fuels investor demand for lower-rated debt.

This week has seen a slew of scheduled and unscheduled debt sales from euro zone countries seeking to take advantage of relentless demand for the region's government bonds, especially from peripheral debt which offers relatively higher returns than core German Bunds.

Plans for the new Italian 15-year bond issue, to be sold via syndication, were unveiled late on Tuesday, following a robust auction of 7.25 billion euros of paper, including a three-year bond sold at record low yields.

Spain also issued its first inflation-linked bond, drawing bids of more than 20 billion euros.

The longer-dated bond offer advances Rome's aim to take advantage of the best borrowing costs on record to lengthen the average life of its debt and avoid the dangerous trap of short-term refinancing obligations. Earlier in the year, it issued 2022 and a 2028 bond.

"The key theme here is that demand for peripheral paper is very strong and the Spanish linker showed 70 percent of the issue was picked up by foreign investors and the Italian syndication should show a similar trend," said Commerzbank strategist Michael Leister.

"Overall this is very positive for peripherals and underscores their funding resislience and the strength of demand and the fact that Treasuries are very keen to increase the duration of their debt and diversify the funding base."

Italian 10-year yields were steady at 2.94 percent, not far from the record low 2.90 percent hit last week, with the fall in yields expected to resume after Wednesday's debt sale. The current 15-year bond yielded 3.50 percent in the secondary market, not far from a record low of 3.47 percent plumbed last week, according to Reuters data.

Spanish 10-year yields dipped 1 basis point at 2.89 percent with Irish equivalents were also slightly lower, both heading back towards record lows.

At the upper end of the credit spectrum, Germany auctions up to 5 billion euros of a new two-year bond that many in the market expect to meet subdued demand given the meagre returns.

German two-year yields were last at 0.11 percent, their lowest levels in nearly six weeks on the ECB monetary easing bets. German 10-year yields, the benchmark for euro zone borrowing costs, were unchanged on the day at 1.42 percent.

"It's a very tricky environment for them to issue given where yields are. A lot of speculation about the ECB has been baked into the cake but it should be able to attract fairly reasonably demand," one trader said. (Editing by Alison Williams)

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