* Spain sells 5 billion euros of 5-, 10-, 30-year bonds
* Madrid completes a quarter of its 2014 funding plan
* Euro zone PMI below expectations, weigh on low-rated debt
By Marius Zaharia and Emelia Sithole-Matarise
LONDON, Feb 20 Spanish bond yields bounced off
eight-year lows on Thursday even as another plump debt sale
helped Madrid complete about a quarter of its 2014 debt
programme just as uncertainty over the euro zone growth outlook
An expected, acceleration in business activity within the
currency union failed to materialise, with Markit's Composite
Purchasing Manager' Index dipping in a sign the economic
recovery remained fragile, particularly outside Germany.
Analysts said the data would not lead to a major shift in
growth expectations, but it raised questions as to whether
investors were perhaps too optimistic at the start of the year
about how far economies would strengthen, helping governments
manage their debts more easily.
Despite the figures being released during the bidding
process, Spain secured strong demand at an auction of 5 billion
euros of five-, 10- and 30-year bonds. The sum raised on
Thursday takes Madrid's funding progress so far this year to a
quarter of the 133.3 billion euro annual target.
It has capitalised on the upbeat sentiment towards the
bloc's more vulnerable economies in the first few weeks of 2014
with more than two thirds of its issuance carrying maturities of
10 years or more.
That puts Madrid in a comfortable position even if economic
data remains below forecasts.
"They are making very good progress (with their funding).
The fact that they are issuing at favourable yields, that
borrowing costs are falling bodes well for their fiscal
situation over the medium term," said Orlando Green, a
strategist at Credit Agricole.
Spanish 10-year yields rose 4 basis points to
3.61 percent, pushing away from eight-year lows of 3.50 percent
hit early on Wednesday.
Yields in all the euro's lower-rated states pushed higher as
the weak PMI data and figures showing activity in China's
factories shrank again in February cooled demand for riskier
Demand for Spanish bonds remains supported by domestic
banks, although foreign investor holdings have increased in
recent months. Some of the buying interest has come from places
where investors would simply not touch peripheral bonds one or
two years ago.
"A theme which has recently risen in client conversations is
that of Asian investors, traditionally big investors in France
in recent years, becoming more comfortable with, in particular,
Spanish paper," Rabobank rate strategist Lyn Graham-Taylor said.
Expectations that the European Central Bank may ease its
monetary policy further due to low inflation have also directed
flows towards peripheral bonds.
Last time when yields were so low in Spain in 2006, rating
agencies had it on triple-A. Now it is slightly above junk, but
analysts say things could be looking up.
Moody's is due to review Spain's Baa3 rating on Friday. Its
rating outlook is stable, but some analysts say the agency could
lift it to positive after it raised Italy's outlook to stable
from negative last week.
"The upcoming Moody's review is expected to point out that
the country's fiscal consolidation and efforts in terms of
structural changes are bearing their fruits," said Annalisa
Piazza, market economist at Newedge Strategy.
Ten-year Italian yields also bounced off
eight-year lows of 3.54 percent hit in the previous session as
markets showed faith in Prime Minister-designate Matteo Renzi's
ambitious reform agenda. They last traded at 3.66 percent.
German 10-year Bund yields, the benchmark for
euro zone borrowing costs, were up 3 bps at 1.69 percent.