* Spain aims to raise up to 5.5 bln euros of bonds
* Madrid selling bonds for second consecutive week
* Economic outlook, bond repayments supporting demand
By Emelia Sithole-Matarise
LONDON, Jan 16 Spanish yields dipped on Thursday before a debt auction which was expected to fare well as investors were likely to plough back large debt repayments into lower-rated euro zone bonds.
Madrid is setting a brisk pace for its 2014 funding programme and offers up to 5.5 billion euros of 2017, 2026 and 2028 bonds, a week after raising an above-target 5.3 billion euros at an auction of 5- and 15-year bonds.
Debt sales from euro zone countries have come thick and fast in the first two weeks of this year as lower-rated euro zone states seek to take advantage of improved market sentiment and frontload their 2014 fundraising.
The glut of bond supply has tempered a sharp rally in peripheral euro zone debt but has not reversed it, a feat which analysts say was due to an upbeat economic outlook for the region fuelling investor demand for higher-yielding bonds.
Euro zone borrowers are also benefiting from over 50 billion euros in debt repayments hitting the market this week.
This is the first January since 2008 when euro zone debt and coupon repayments exceed expected debt supply from the region, according to Barclays. The difference is 10 billion euros, compared with a negative 23 billion euros in 2013.
"Sentiment is quite positive on periphery bonds and Spain is one of the bright spots there with quite important improvements in the economy," said ING strategist Alessandro Giansanti.
He was referring to comments by Spanish Economy Minister Luis de Guindos this week that the economy probably grew by about 0.3 percent in the fourth quarter of 2013. This was its fastest pace since 2008 which showed the euro zone's fourth largest economy was recovering more briskly than initially thought.
MORE SCOPE FOR RALLY
"We are starting to see a revival of demand from Spanish banks and that's a difference from what we've seen in the last months of 2013 when they were selling some of their debt. There's also demand from non-domestic investors. That should support the rally for Spanish bonds," Giansanti added.
Spanish 10-year yields fell 1.3 basis points to 3.76 percent, grinding back towards five-year lows just below 2.70 percent plumbed last week.
Although Spain's 10-year yield premium over German benchmarks has bounced off from 2011 lows below 180 basis points, many analysts expect them to resume their fall in coming days with a slew of Spanish debt repayments at the end of the month expected to be reinvested into the market.
"Relative value considerations aside, we think the periphery rally has much further to go and expect these auctions to go well, despite the lack of pre-auction cheapening," Credit Agricole strategists said in a note.
Yields on other peripheral euro zone bonds were also lower, with Portuguese 10-year yields down 4 bps at 5.17 percent. They fell to their lowest in more than three years on Wednesday after Lisbon said it expected to resume bond auctions in the first half of 2014 as it prepares to exit its international bailout programme.
Italian equivalents were 1.1 bps down at 3.86 percent while top-rated German 10-year yields were lower by a similar amount at 1.82 percent.