* Italy sells long-term bonds, demand levels closely watched
* Some analysts recommend buying on dips before Italy polls
* Germany to sell two-year bonds with 0.25 pct coupon
By Marius Zaharia
LONDON, Feb 13 Italian bond yields fell slightly
on Wednesday before an auction that will test investors'
appetite for the country's longer-term bonds before an election
later this month.
Italian debt has been under selling pressure recently as a
comeback in polls by former Prime Minister Silvio Berlusconi's
party raised the prospect of a fragmented parliament that could
hamper the next government's reform efforts.
Final polls show Berlusconi's centre-left opponents are
still on course to win the Feb 24-25 election, although they are
likely to have to form a coalition with outgoing premier Mario
Ten-year Italian yields were 3.5 basis points
lower on the day at 4.47 percent. Shorter-term yields also fell.
As well as in previous session, traders said paper was being
snapped up by some domestic investors and foreign hedge funds
betting that Italy will continue to keep a cautious fiscal
policy after the election.
"We haven't seen much flows, but there have been some
domestic (investors) and some fast money buying recently purely
because yields have gone up," one trader said. "Some people are
going to buy on dips, but it doesn't mean that we won't see more
volatility between now and (the end of the month).
The government is aiming to sell up to 3.5 billion euros of
three-year bonds and between 1 and 1.75 billion euros of 15- and
30-year bonds, together with five-year floating rate CCTeu
certificates. The 30-year paper is the first on
offer at a regular auction since May 2011.
"In terms of auctions, investors are a bit spoiled after the
... (good) results in January. If Italy sold only the lower end
of its target range, that would be a disappointment," DZ Bank
strategist Christian Lenk said.
He said he still saw Italian bonds as among the euro zone
outperformers in the medium term as he did not expect the
country to "completely reverse" recent economic reforms.
"We accept the fact that we will see volatility ahead of the
elections. But we think they offer a decent yield pick-up
especially as many other houses have turned more cautious," he
With a similar view, ING strategists also recommend a
pre-election pick-up in Italian yields as a buying opportunity.
Spanish 10-year yields fell 7 basis points to
5.27 percent, with traders also citing domestic bargain hunters.
Spanish debt outperformed its Italian counterparts as it does
not face supply pressure this week.
Bund futures were 14 ticks lower at 142.40, having
traded in a narrow 142.36-142.69 range during the session.
Ten-year yields rose 2 bps to 1.66 percent.
Germany plans to sell 5 billion euros of new two-year
bonds, carrying a 0.25 percent coupon. The previous two Schatz
benchmarks had a zero percent coupon.
Two-year yields ended 2012 in negative territory due to
fears at the time that potential large-scale automatic spending
cuts in the United States could have sent the global economy
into a deep recession. Those cuts have been avoided, or at least
delayed, whetting investors' appetite for riskier assets.
Slightly-better-than-expected economic data and growing
confidence in the euro zone's banking system as lenders repay
crisis loans to the European Central Bank have also led to
rising money market rates and higher short-term German yields.
"We expect a further rise in yields at the short end of the
German curve, but the bonds are much cheaper than two months ago
so the auction should be rather O.K.," DZ Bank's Lenk said.