* Spain sells above-target 5.3 billion euros of bonds
* Interest for Portuguese debt offer tops 9 billion euros
* Lisbon seeks to confirm market access before bailout exit
* ECB's ultra-easy stance supports demand for periphery debt
By Emelia Sithole-Matarise
LONDON, Jan 9 Investors snapped up Spanish bonds
at Madrid's first 2014 sale on Thursday and showed strong
interest in an offering of Portuguese debt as an improved
economic outlook fed demand for higher-yielding euro zone bonds.
Some investors question how sustainable falling peripheral
yields will be after 18 months of declines since a pledge of
European Central Bank support. But such concerns, notably over
ratings and liquidity, seemed muted among buyers this week.
Spain's 10-year yields fell to their lowest in
four years on Thursday after it sold an above-target 5.3 billion
euros of five- and 15-year bonds.
Madrid is hoping to capitalise on improved investor
sentiment towards countries on the euro zone's periphery as it
kicks off a busy funding programme this year.
Junk-rated Portugal is taking advantage of benign market
conditions and a fall in its yields to sell five-year bonds via
a syndicate of banks as it tests its ability to tap markets
before giving up its international bailout support this year.
Investor interest in the bond was almost five times the
2.0-2.5 billion euros Lisbon was expected to raise, according to
the issue's lead manager. Portuguese 10-year bond yields fell to
near seven-month lows.
The sales follow strong demand on Tuesday for Ireland's
first bond sale since it exited its EU/IMF bailout in December
and are further confirmation of investor appetite for
higher-yielding euro zone debt as the region's economy shows
signs of picking up.
Expectations that the European Central Bank will keep
interest rates low for a long period, or even cut them further,
to support recovery have supported demand not only for the
periphery but also higher-rated issuers such as France, whose
2014 debt sales got off to a solid start.
The ECB held its main interest rate at a record low 0.25
percent at its meeting on Thursday. It is expected to reiterate
its readiness to ease if inflation stays far below its target or
money market conditions tighten too much.
"The Spanish auction was solid and we are seeing the bonds
continuing to rally and for Portugal it's a similar story - the
sale seems to be going very well. Sentiment is very, very
positive for the periphery," said Michael Leister, a senior
interest rate strategist at Commerzbank.
"We believe it's going to continue but ... the momentum is
going to slow down eventually with supply picking up and also
investors will be keen to book some profits after this
Spanish 10-year yields were down five basis
points at 3.75 percent, having fallen almost 50 basis points
this year to four-year lows, while five-year yields
were nine bps lower at 2.26 percent, the lowest since at least
Portuguese 10-year yields were three basis
points lower at 5.40 percent, extending their 70 bps decline so
far this year while five-year yields were steady on the day at
PORTUGUESE RATINGS EYED
Investor appetite for Portuguese bonds has also perked up on
bets that rating agencies could lift the country's credit
standing out of its junk status.
Moody's is due to announce its review for Portugal on Friday
while Standard & Poor's will give its decision next week under
new EU-regulated scheduled ratings announcements.
"We expect good news," said Societe Generale strategist
Ciaran O'Hagan of the pending review, adding that Thursday's
solid issue would help. "A successful tap will prove to the
rating agencies that Portugal is back in the game," he said.
Confidence in most euro zone states' ability to fund
themselves easily in secondary markets this year contrasts
sharply with recent years, when soaring yields risked shutting
Italy and Spain - the euro zone's third and fourth largest
economies - out of the market.
Some investors, however, worry the market is not liquid
enough and credit ratings high enough to extend the rise in
prices that started when ECB head Mario Draghi said in July 2012
he would do whatever it took to protect the euro.