May 16, 2013 / 7:56 AM / 4 years ago

EURO GOVT-Spanish, Italian yields dip as supply pressure eases

3 Min Read

* Italian, Spanish yields edge lower after supply wave

* Peripheral debt seen resuming rally

* Bunds find support in ECB easing expectations

By Marius Zaharia

LONDON, May 16 (Reuters) - Italian and Spanish bond yields dipped on Thursday and were seen dropping further as supply pressure eased after the two countries sold large amounts of debt in syndicated deals earlier this week.

Italy sold 6 billion euros worth of 30-year bonds on Wednesday, its first ultra-long debt sale since 2009. On Tuesday, Spain sold 7 billion euros of 10-year bonds, more than expected.

The sales confirmed last week's market rumours which had pushed Spanish and Italian benchmarks yields some 20 basis points higher in the previous few sessions.

"For Italy and Spain supply has been a factor behind the recent rebound in yields," said Jan von Gerich, fixed income chief analyst at Nordea in Helsinki.

"But the market is still interested in taking carry positions. The downtrend (in yields) has not run its course. I think (Italian and Spanish) yields will hit new lows ... in the next couple of weeks."

Italian 10-year yields were 3 bps lower on the day at 4.02 percent, while Spanish 10-year yields fell by a similar amount to 4.34 percent. Earlier this month, they hit 2-1/2 year lows of 3.68 percent and 3.95 percent, respectively.

Some traders did not expect the rally in peripheral bonds to resume at full speed due to the sheer amount of new debt investors have had to absorb recently. Portugal and Slovenia also issued bonds via syndication earlier this month.

"There might be a little indigestion so it might take a little while (until peripheral debt recovers)," one trader said.

German Bunds edged up as the recent data stream out of the euro zone reinforced expectations that the European Central Bank will ease policy further.

The euro zone economy contracted by 0.2 percent in the first quarter, data showed on Wednesday. Later on Thursday, final inflation figures for April are expected to match a preliminary estimate of 1.2 percent year-on-year.

Bund futures were 10 ticks higher at 144.74.

"I expect Bunds to see a rebound ... The door was open for renewed pricing of negative (ECB deposit) interest rates. I'm not saying that's going to happen, but at some point the market will price it in," von Gerich said.

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