* 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 and Marius Zaharia
LONDON, Oct 30 Most euro zone bonds firmed 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 hit new two-month highs 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.
"The Fed might be a bit more vocal about taking more time to
look at data before tapering. The current environment is very
supportive for bonds," said Gianluca Ziglio, executive director
of fixed income research at Sunrise Brokers.
The Bund future closed 58 ticks up at 141.85,
having hit its highest since August at 141.88 minutes before the
end of the trading session. German 10-year yields
were 5 basis points down at 1.69 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, a sign
that investors believed the rally could continue.
Some analysts expected a near-term pause, however.
"A lot of this postponed tapering should be priced in
already ... so we wouldn't be surprised to see ... a bit of
profit-taking," Commerzbank strategist Rainer Guntermann said.
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.
An unexpected slowdown in German annual inflation for
October supported such speculation. Euro zone inflation
data due on Thursday is expected at 1.1 percent, way below the
ECB's close-to-2-percent target.
Analysts say ECB speculation may have been one of the
factors behind the strong demand an auction of 6 billion euros
of Italian debt where 10-year borrowing costs fell to six-month
lows. The sale also benefited from investors ploughing back some
of the 24 billion euros in redemption and coupon payments due
Italian 10-year yields were 4 bps up at 4.18
percent as the market absorbed the supply, while equivalent
Spanish yields were flat at 4.06 percent. Italian
and Portuguese yields were the only ones rising in the region.
"The picture looks supportive going into the ECB meeting,
but things might change (after that) ... valuations look a bit
stretched," Sunrise Brokers' Ziglio said.
Spain has outperformed Italy in the past week 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 later as
Italy still benefits from a more liquid debt market which made
it the portfolio choice for foreign investors.