Italy, Spain yields dip to new record lows as cash glut eyed

Tue Jul 29, 2014 4:32am EDT

* Up to 60 bln euros of coupon, debt repayments due this wk

* German 10-year yields also fall to record lows

* Portuguese yields underperform after Monday's sharp rally

By Emelia Sithole-Matarise

LONDON, July 29 (Reuters) - Spanish and Italian bond yields hit the latest in a series of record lows on Tuesday with investors looking to 60 billion euros of coupon and debt repayments from the two countries this week to return to the market.

Yields on 10-year German bonds, the benchmark for euro zone borrowing costs, also touched all-time lows with the prospect of a fresh round of longterm loans to banks from the European Central Bank from September also supporting demand for euro zone bonds.

With Italy the only euro zone country to sell debt this week, cash flow will be ample in the market, keeping euro zone yields subdued at or near historic lows.

"This is added liquidity which must be reinvested," said Patrick Jacq, an interest rate strategist at BNP Paribas.

"The environment favours carry trades," he said, referring to trades where banks use cheap central bank money to invest in peripheral euro zone bonds that still offer relatively higher yields than those in core debt, despite a two-year rally.

Spanish and Italian 10-year yields slipped 1.5 basis points to 2.49 percent and 2.65 percent respectively while equivalent Irish yields were 2.5 bps down at an all-time low of 2.18 percent.

Given the glut of coupon and debt repayments, Italy's auction of up to 7 billion euros of five- and 10-year fixed-rated bonds and five-year floating-rate notes linked to euro zone inflation due on Wednesday is expected to draw solid demand.

Portuguese 10-year yields rose 3 bps to 3.62 percent , pausing for breath after a sharp rally on Monday to one-month lows after Moody's upgraded the country's credit rating and dismissed concerns that troubles at its largest bank could spread.

Monday's rally paused as investors digested comments by Portugal's central bank late on Monday that if Banco Espirito Santo posts a loss larger than its existing cushion of 2.1 billion euros, a capital increase will be used to guarantee adequate solvency levels.

Market participants said that much of the anxiety over the impact on government finances was overdone.

"The degree of handwringing over the ESI/ESFG credit situation, in Portugal, seems excessive, if for no other reason that the sums involved are sub-critical for Portugal," Credit Agricole strategists said in a note.

"Summer has brought some periphery pressure in recent years but, on the whole, that dynamic has proved to be a buying opportunity." (Editing by Mark Heinrich)

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