* German, Italian debt sales meet strong demand
* Fed seen maintaining current stimulus into 2014
* ECB policy outlook also supporting euro zone bonds
By Emelia Sithole-Matarise
LONDON, Oct 30 Euro zone bonds mostly rose on
Wednesday with German and Italian debt sales drawing solid
demand as investors bet on the U.S. Federal Reserve keeping
monetary policy unchanged after its meeting later in the day.
German Bund futures have risen to two-month highs this week
as markets rallied on expectations the Fed will maintain its
current pace of bond-buying in a bid to prop up an economy
damaged by this month's government shutdown in Washington.
A recent run of mixed U.S. economic data has persuaded many
in the market that the Fed will keep to its $85 billion a month
bond purchases until at least early next year.
"It looks unlikely that the Fed will back off the tapering
plan completely," said Rainer Guntermann, a strategist at
Commerzbank, "But any hint that they are pedaling back and that
the fiscal uncertainty could have a much more lasting impact on
economic activity would be a dovish statement.
"A lot of this postponed tapering should be priced in
already ... so we wouldn't be surprised to see at some point and
possibly ...tonight as we get into the FOMC a bit of
The Bund future was last 31 ticks up on the day at
141.58, its highest since August, while German 10-year yields
were 2 basis points down at 1.72 percent.
Earlier, Germany sold 3.4 billion euros of 10-year Bunds
with investors bidding for 1.7 times the amount offered, up from
1.3 the last time the paper was auctioned last month.
ECB POLICY WAGER
Euro zone bonds across the credit spectrum have also been
supported by market speculation that the European Central Bank
will ease monetary policy further to support a fragile recovery
threatened by a strong euro and curb a rise in money market
rates as excess liquidity in the euro system dwindles.
Italy's 10-year debt costs fell to a six-month low at an
auction of 6 billion euros of medium to longer-term bonds, which
also benefited from investors ploughing back some of the 24
billion euros in redemption and coupon payments due this week.
"Demand for both lines was decent as investors seem to have
more confidence in the developments of the Italian political
situation and redemptions were supportive this week," Newedge
market economist Annalisa Piazza said.
"Both lines gave some concession ahead of today's auction
and this might have also been a supportive factor."
Italian 10-year yields were 2.5 bps up at 4.17 percent
as the market absorbed the issues while equivalent
Spanish yields were slightly lower at 4.05 percent <ES10YT=TWEB.
Spain has outperformed Italy in recent days with investors
encouraged by data showing the Iberian country exited a two-year
recession in the third quarter thanks to strong exports.
Barclays strategists say Spanish yields could trade 20 to 30
bps below Italian equivalents in coming days, arguing that
Spain's economic prospects in coming months look more positive,
with Madrid well ahead of Rome with structural reforms.
But they said this outperformance could peter out in coming
months as Italy still benefits from a more liquid debt market
which made it the portfolio choice for foreign investors.