* Portuguese yields close to piercing below 5 pct
* Hopes S&P will upgrade ratings outlook fuel demand
* Spanish yields fall after above-target debt sale
* Economic outlook, bond repayments supporting demand
By Emelia Sithole-Matarise
LONDON, Jan 16 Portuguese yields slid nearer
3-1/2-year lows on Thursday as expectations Standard & Poor's
will raise the country's credit ratings outlook and facilitate a
resumption of bond auctions fueled investor demand.
Junk-rated Portuguese bonds outpaced euro zone peers for a
second consecutive day, including Spain which saw investors snap
up 5.9 billion euros of debt earlier - above the 5.5 billion
euros Madrid was targeting at its second auction of 2014.
Improving global growth and signs the euro zone economic
recovery is gaining traction as well as signs that the cycle of
ratings downgrades for the bloc's weaker economies may be over
is spurring a rally in higher-yielding bonds.
Investors anticipate a positive review of Portugal's credit
outlook on Friday when S&P is due to make its assessment under a
new EU-regulated schedule. Moody's is also scheduled to decide
on Ireland which it rates sub-investment.
The European Union rules came into force this month making
credit agencies operating in Europe say when they will review a
S&P is seen deviating from Moody's which on Friday refrained
from releasing a statement on Portugal when it was expected to
announce its review, saying it was not obliged to if it made no
change to its stance.
S&P has a negative outlook on Portugal and, with its next
review towards mid-year, the ratings agency has said it will
definitely release a statement on all scheduled dates. Last
Friday it affirmed Germany's triple-A ratings and left them at
"Portugal is on negative credit watch, that's not in line
with recent developments so there will be a positive move (from
S&P)," said Societe Generale strategist Ciaran O'Hagan.
"Overall growth is a key driver for the rally in the
periphery. If growth, especially U.S. growth is strong it's very
much a rising tide lifting all boats ... Portugal along with
other European economies do better that's good for investor
confidence and will lead to lower bond yields."
Portuguese 10-year yields dropped as much as
14 basis points to 5.07 percent, taking them to mid-2010 lows
before Lisbon was sucked into the euro zone debt crisis which
led it to seek international aid in 2011.
Analysts see scope for the yields to fall below 5 percent as
long as the outlook on U.S. and European growth remains upbeat
and barring mis-steps in Lisbon's reform drive.
Lisbon is aiming to follow Ireland and give up the rescue
package later this year as its economy recovers from its worst
recession since the 1970s. It said on Wednesday it expects to
resume bond auctions in the first half of 2014 before the
Spanish yields dipped 3 bps to 3.74 percent,
inching towards five-year lows just below 3.70 percent hit last
week after Madrid sold more debt than planned.
Madrid is setting a brisk pace for its 2014 funding
programme and the sale of 2017, 2026 and 2028 bonds comes a week
after Madrid raised an above-target 5.3 billion euros at an
auction of 5- and 15-year bonds.
The glut of bond supply has tempered a sharp rally in
peripheral debt but not reversed it, which analysts said showed
the strength of the hunt for yield. Euro zone borrowers are also
benefiting from over 50 billion euros in debt repayments hitting
the market this week.
"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," said ING strategist
Safe-haven German bonds also pushed higher, with some
traders citing technical-led buying after the Bund future
rose above a support level around 140.91, which was
this week's peak. German 10-year yields were 4 bps
down at 1.79 percent while Irish equivalents were
1.3 bps lower.