5 Min Read
* 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 (Reuters) - 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 country's ratings.
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 stable outlook.
"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 bailout exit.
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 Alessandro Giansanti.
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.