* Portugal bond sale first since bailing out BES
* Relatively higher yields lure investors
* German 5-yr debt sale hurt by shrinking yields, Ukraine
(Updates prices into close)
By Emelia Sithole-Matarise and Michael Turner
LONDON, Sept 3 (Reuters/IFR) - Portugal successfully sold on
Wednesday its first bond since it bailed out Banco Espirito
Santo, with expectations of more monetary stimulus from the ECB
spurring yield-hungry investors to snap up the 15-year paper.
Orders for the bond exceeded 8 billion euros ($10.5
billion), more than twice its 3.5 billion euro size, a result
which bodes well for Greece's plans to sell new seven-year bonds
by the end of the year.
This contrasted sharply with euro zone heavyweight Germany's
auction of new five-year bonds where demand was hurt by cooling
demand for safe havens after Ukraine said it had agreed with
Russia steps towards a ceasefire in eastern Ukraine.
Investors were also turned off by the new debt's meagre
yield of 0.25 percent and an exchange glitch, with the auction
drawing barely enough bids to cover the total amount offered.
Given the vanishing yields on top-rated bonds and record low
borrowing costs for larger peripheral countries like Italy and
Spain, market strategists see little problem for the sale as
Portuguese bonds still offer relatively higher yields.
The 15-year bond offers a 3.875 percent coupon and was the
longest paper sold by Portugal since 2008. It follows Spain's
private placement this week of a 50-year bond offering a 4
percent coupon. Long-dated bonds tend to be held by stable but
conservative investors like pension funds and insurers, while
hedge funds and other trading accounts favour shorter bonds.
The Portuguese debt agency said half of the amount went to
UK and U.S. investors, with only 6 percent going to domestic
investors. Only 5.7 percent went to hedge funds, with the rest
going to banks and other asset managers.
"After the Spanish 50-year placement, (the Portuguese)
15-year sale clearly shows that things are much better for
Portugal and shows as well a strong global appetite for yield
and for European yield in particular," said Jean-Francois Robin,
head of fixed income strategy at Natixis.
"We see a lot of non-euro investors positioning themselves
into the euro market and some investors are moving from core
market to peripherals."
Portuguese 10-year yields came off the day's highs to trade
a touch up at 3.26 percent after the sale.
They slightly outperformed German bonds whose 10-year yields
rose 3 bps to 0.96 percent on the news of potential progress
towards a peaceful resolution of the crisis in Ukraine.
The sale was also a significant milestone for Portugal,
which emerged from its EU/IMF bailout in May this year and has
been plagued by troubles in its banking sector.
Some analysts say that demand for Portugal's deal will be a
truer reflection of investor demand for the country, as a bond
of that length is unlikely to be included in any future ECB
government debt purchases.
"The market is still in a positive mood in terms of
expectations of more stimulus from the ECB ... There's still
demand for longer (bonds) due to the low level of rates at the
shorter end," said Alessandro Giansanti, a strategist at ING.
Market anticipation of an asset-purchase programme, known as
quantitative easing (QE), has reached fever pitch in recent
weeks after ECB president Mario Draghi dropped hints of such a
scheme at a speech in Jackson Hole, Wyoming in late August.
While many in the market expect the ECB to hold off from QE
for now, any strong hints that it is advancing preparations for
such a programme are expected to keep euro zone bond yields
around historic low levels.
"We think that any sign of disappointment should be faded,
especially on peripheral euro zone government bonds as the
prospects for a rapid improvement in fundamentals across the
euro zone are minimal and hence imply further stimulus by the
ECB," Citi strategists said in a note to clients.
(1 US dollar = 0.7607 euro)
(Editing by Raissa Kasolowsky and Toby Chopra)