* Italy finds strong demand for its bonds at auction
* Central bank policies support yield hunting
* Italian bonds outperform, Bunds fall
By Marius Zaharia
LONDON, April 11 Italian bond yields dipped on
Thursday after the country found solid demand at a debt auction
as investors sought high-yielding assets on prospects of further
monetary easing by major central banks.
Expectations for a European Central Bank rate cut and the
Bank of Japan's plans to print unprecedented amounts of money to
stimulate the economy have pushed investors to take on more risk
in recent days in search of higher returns.
Italian 10-year yields, down more than 50
basis points since late March, fell 3 basis points on the day to
4.28 percent - near their recent lows and some 15 bps lower than
the close before the country's indecisive Feb. 24-25 elections.
The heavily indebted euro zone member, which is still
struggling to form a government, sold 7.2 billion euros worth of
bonds, close to the top of its 5.5-7.5 billion euros target.
Borrowing costs for three years fell to their lowest since
January and demand, as measured by the bid/cover ratio, was
higher than at a previous sale.
"The yield-grab theme seems to be dominant in the market and
BTPs (Italian bonds) seem to be the main beneficiaries at the
moment," said one trader. "There's nothing fundamentally related
to Italy, it's just that all the other yields are so low."
Investors doubt Japanese investors trying to switch into
higher-yielding, non-yen assets will be willing to take the risk
of holding Italian bonds given the political crisis there.
However, the anticipation of flows from Japan to assets
elsewhere in the euro zone is seen making Italian yields
attractive compared with those of other bonds in the region.
This continues to fuel demand for Italian debt from
investors relying on the ECB's as-yet untested bond-buying
programme to protect them in case sentiment turns.
"I don't think Italian bonds are profiting from the Japanese
argument," said Mathias van der Jeugt, rate strategist at KBC.
"But the ECB and the 'Draghi put' remain a supporting
factor," he said, referring to ECB President Mario Draghi's
pledge last July to do whatever it takes to save the euro.
The strong performance of Italian bonds despite the
political uncertainty and the weakening economic fundamentals is
puzzling many analysts.
"The market seems to me overly complacent," said Alan
McQuaid, chief economist at Merrion Stockbrokers. "I'm a bit
uneasy with the whole thing. It is why we got in this mess in
the first place - bond vigilantes were asleep."
Not everyone agrees with that assessment. Norbert Wuthe, a
rate strategist at Bayerische Landesbank, said the market is
right to be more relaxed about risks in Italy.
"Italy has proven in the past that it is able to produce
primary budget surpluses for an extended period of time and it
is the country where the fiscal pact was implemented in the
constitution," Wuthe said.
"Even if the paralysis in the government will continue,
there is an automatic process taking care of the fiscal
situation. It is flying on auto-pilot."
He expects 10-year yields to head towards the 3.8-4.3
percent range seen before its borrowing costs blew up in 2011.
In Germany, safe-haven Bund futures were 35 ticks
lower on the day, having gradually weakened after Italy's bond