* Spain, Italy hit roughly 40 pct of annual funding target
* Supply pressures lifts Spanish, Italian yields off recent lows
* Fitch to revise Spain, Italy ratings on Friday (Updates with auction results, fresh comments)
By Marius Zaharia
LONDON, April 24 (Reuters) - Spanish and Italian bond yields edged up from their lowest levels in more than eight years on Thursday as chunky debt sales helped the two countries complete about 40 percent of their funding programmes for this year.
Rising yields are common on days when debt sales are scheduled as investors make room in their books for the new paper, but analysts said the smooth completion of the auctions suggested the pullback was unlikely to be sustained.
The high returns offered by their recovering economies and expectations of further European Central Bank monetary policy easing are prompting investors to add Spanish and Italian debt to their portfolios.
The fact that the two countries, once at the forefront of the euro zone debt crisis, are so advanced in their funding progress makes this year’s rally in their bond markets even more impressive, some analysts said.
“These countries have excellent access to primary markets. It’s certainly an extra argument to hold on to your long positions,” said Christoph Kind, head of asset allocation at Frankfurt Trust, referring to bets that bond prices in Spain and Italy would rise further and implicitly that yields would fall.
The possibility that the ECB may eventually print money to fight low inflation has been a key driver of the rally in Spain and Italy and is expected to continue to offer support.
ECB President Mario Draghi said in Amsterdam on Thursday that a worsening of the inflation outlook would prompt the central bank to launch broad-based asset purchases, which economists call quantitative easing.
Spanish 10-year yields rose 2 basis points to 3.07 percent, while Italian 10-year yields added a similar amount to 3.10 percent. Both remained within touching distance of recent lows, having fallen roughly one percentage point since the end of last year.
“We certainly see some supply pressure ... (but) overall investors are still craving for yield pick-up as you have ongoing speculation about QE,” said Christian Lenk, a strategist at DZ Bank.
Spain sold 5.6 billion euros in three-, five- and 10-year debt, slightly above the top range of its target, paying record-low borrowing costs.
Following the sale, the Spanish Treasury has reached more than 43 percent of its bond issuance target for this year versus 40 percent in January-April last year. That compares with 38 percent in 2012, 36 percent in 2011 and 32 percent in 2010.
Italy sold 5 billion euros of zero-coupon and inflation-linked bonds, taking its year-to-date fundraising to nearly 39 percent of its 2014 goal. Rome has another auction scheduled in April at which it plans to sell up to 9 billion euros in bonds.
“It’s a pretty good sign that both these countries are well advanced in their funding. It’s a sign of returning confidence,” said Mathias van der Jeugt, a strategist at KBC in Brussels.
“In 2015 they have high redemptions so if they can finish this year’s funding early it could give them a head start for next year.”
In what could further boost sentiment towards the euro zone’s lower-rated debt markets, Fitch is due to reassess its BBB rating of Spain and BBB+ rating of Italy on Friday.
Analysts expect the negative outlook on Italy’s rating to be changed to stable and do not rule out rating upgrades on the back of the two countries’ improved access to funding.
“We still like (peripheral bonds) and we see any pullback as a buying opportunity,” one trader said. (Reporting by Marius Zaharia; Editing by Catherine Evans)