* Cyprus sells 750 mln euro bond at 4.85 percent
* Five-year bond offers highest returns in euro zone
* Returns to markets just a year after bailout
* ECB easing fuels risk appetite, hunt for yield
(Adds bond pricing, comments from Cyprus finance minister)
By John Geddie and Michele Kambas
LONDON/NICOSIA, June 18 Cyprus returned to
markets on Wednesday little more than a year after it was bailed
out, with investors snapping up a five-year bond that offered
the highest yield of any comparable euro zone debt.
Its comeback - the fastest of any country rescued by euro
zone peers during the bloc's debt crisis - comes while capital
controls are still in place following its 10 billion euro EU/IMF
bailout, which also imposed losses on bank depositors.
But with ultra-loose central bank monetary policy having
pushed the returns on fixed income assets to historic lows, the
4.85 percent yield on offer for the 750 million euro bond drew
orders of around 2 billion euros.
"We put in a bid not because Cyprus is the soundest credit
in the world, but because there's a hunt for yield going on and
the bonds will perform," said Guido Barthels, CIO at
Luxembourg-based Ethenea. "What else is there to buy in the euro
Cyprus initially sought to raise 500 million euros from the
sale but raised it to 750 million after strong demand from
investors, Finance Minister Harris Georgiades said.
He told reporters that the sale was a step towards Cyprus'
"systematic" return to markets after a three-year hiatus and
pledged the country would not let up on its fiscal reforms.
The sale attracted investors mainly from Britain, other
European countries and Cyprus, with investment funds absorbing
51 percent of the issue, hedge funds 27 percent and banks 22
percent, the finance ministry said in a statement.
It comes two months after twice-bailed-out Greece sold a new
five-year bond at a yield of 4.95 percent - one of the swiftest
returns to markets by any country following a default. Those
bonds have since rallied to yield 4.25 percent,
according to Tradeweb, giving investors a quick profit.
Barthels at Ethenea was hoping the Cyprus deal would also
offer immediate gains. He said he planned to sell the bonds when
the yield reached 4 percent in secondary markets.
Cyprus has not borrowed on international markets since May
2011, at the height of the euro zone's debt crisis, when high
yields on its existing bonds made external borrowing impossible.
Last year lenders extended the island a 10 billion euro
financial lifeline, conditional on an economic adjustment plan,
after its banking system imploded. The deal included a debt
exchange that ratings agencies classed as a default, and
Cyprus's credit ratings remain deep in junk territory.
Under its adjustment plan, Cyprus was not seen returning to
financial markets until the end of 2015, but improving market
conditions have accelerated its comeback.
"The ongoing hunt for yield continues to see the market very
receptive to bailed-out countries looking to make a comeback and
the success of these comebacks, in turn, further underpins
positive sentiment for the country in question," Rabobank
analysts said in a note on Wednesday.
Georgiades said that the cash raised would go towards
refinancing domestic debt. With Wednesday's bond issue, the cost
of servicing debt would be "clearly lower" than 3 percent,
compared with just over 3 percent at present, and 4.3 percent a
year ago, he said.
Returns on all euro zone sovereign bonds have been squeezed,
to record lows in many cases, as the European Central Bank has
pumped the market with liquidity and cut interest rates so far
that some have turned negative.
This dynamic is expected to further fuel investor appetite
to take higher risks to maximize profits, exacerbating fears
that some bonds have become overvalued.
"The risk is that valuations and primary market dynamics
aren't related to fundamentals anymore," said Michael Leister,
senior strategist at Commerzbank.
Vanguard Group Inc's new bond chief, Gregory Davis, said
investors could be ignoring warning signs in less stable
countries in their search for yield.
Cyprus's economy is shrinking as the terms of the bailout
bite, although a forecast contraction of 4.2 percent this year
is less than the 4.8 percent initially expected and some see the
decline in output at closer to 3 percent. The IMF expects a
return to growth in 2015, at a modest 0.9 percent rate, after
three years of recession.
That hasn't put off investors, however.
"It's not a domestic issue, it's a European issue. People
are searching for yield," said Martin Wilhelm, founder of IfK, a
bond boutique based in Kiel, Germany, which runs a bond fund
with Acatis and placed an order for the new Cypriot paper.
In other euro zone government bond sales on Wednesday, Spain
auctioned 3.1 billion euros of 3- and 5-year bonds at record low
yields while Germany sold 4.108 billion euros in 10-year bonds.
(Additional reporting by Sarka Halas at IFR and Emelia Sithole
and Marius Zaharia at Reuters; Editing by Catherine Evans and