* Irish, Portuguese, Italian bond yields rise
* Spanish yields off 8-yr low
* Investors are already long in Spain, Italy - Citi
By Emelia Sithole-Matarise and Marius Zaharia
LONDON, Jan 23 Lower-rated euro zone bond yields
rebounded from multi-year lows on Thursday as investors sold on
some of the peripheral paper they have been flooded with since
the start of the year.
Data showing weaker U.S. factory growth and a report
suggesting a slowing in Chinese manufacturing soured demand for
higher risk assets, prompting some profit-taking in peripheral
euro zone debt and lifting safe-haven German bonds.
Large amounts of supply hitting the market have left some
investors holding more paper from peripheral euro zone countries
than they want or are allowed to keep by their risk managers,
prompting some offloading of the bonds, traders said.
In the latest sale of bonds from the bloc's more vulnerable
economies, Spain issued 10 billion euros ($13.6 billion) of a
new 10-year bond on Wednesday, drawing demand of almost 40
billion - a record for European governments.
Helped by an improving euro zone growth outlook, Madrid has
sold larger-than-expected amounts of bonds every week since the
start of the year, completing 16.6 percent of this year's 133.3
billion euros funding target already.
This follows strong sales in Ireland, Portugal and Italy,
with Rome due to sell bonds next week as well.
While signs of recovery in these economies have reassured
investors that government finances will improve, yields rose on
Thursday despite forecast-beating euro zone business surveys.
"It's logical that there might be some accounts taking a bit
of risk off the table after the big amounts of supply delivered
to the market especially after the 10 billion euros of supply
from Spain," said Gianluca Ziglio, head of fixed income research
at Sunrise Brokers.
Portuguese 10-year yields jumped 10 basis
points to 5.015 percent while equivalent Italian yields
rose 3 bps to 3.86 percent and Spanish yields
were 2 bps up at 3.76 percent, retreating a little
further from recent eight-year lows.
Irish 10-year yields were 1 basis point higher
at 3.30 percent, having hit record lows this week.
"This isn't necessarily to say the rally is over but most
likely signifies that after the strong run we have seen the
market is pausing for breath," said Investec chief economist
German 10-year Bund yields, the euro zone
benchmark were down 5 basis points at 2.61 percent, tracking
gains in U.S. Treasuries after a report on factory activity in
the United States cooled bets the Federal Reserve would
accelerate its pace of trimming its bond purchase stimulus.
Ziglio also said relatively lighter debt sales from Germany
against big coupon and bond redemptions supported Bunds.
Others say the large amounts of bonds hitting the market
from the periphery may prompt a pause in this year's strong
rally in lower-rated bonds, especially given that the amount of
debt to be sold exceeds scheduled repayments in February.
"People are fairly long of this stuff (peripheral bonds) so
there might be some supply indigestion," one trader said.
A "long" position is in effect a bet on further price rises.
A "short" is a bet in the opposite direction.
Using global flows data, analysts at Citi have come up with
a seven-notch scale of how investors are positioned in certain
markets, ranging from "very short" to "very long".
They said hedge funds globally and U.S. "real money"
investors were "very long" Spanish bonds, while domestic
investors and those based in the euro zone and British were
"long". Central banks were "small long", while Japanese
investors were "small short".
"Real money" is market jargon for long-term investors,
usually pension funds and insurers.
In the Italian bond market, hedge funds and real money
investors in the euro zone and Britain were "long", while U.S.
real money investors were "short". In general investors in
Ireland were less long than in Spain and Italy, Citi said.