* Spanish 10-year bond yields jump back above 5 percent
* Dealers seen clearing out space for new bond supply
* Bunds rebound after deep selloff, fall may not be over
By William James and Ana Nicolaci da Costa
LONDON, Jan 14 Spanish and Italian bonds
weakened while German Bunds rose on Monday as the recent strong
rally in riskier euro zone assets faded in a move blamed largely
on impending auctions and technical trading.
The trading unwound a significant chunk of last week's
demand for higher yielding assets, but market participants said
it did not represent a major change of sentiment from end
investors who buy bonds to hold over the long term.
"We're not seeing investors rushing for the doors or
anything. This is more like dealers getting themselves in a good
position for the supply later this week," a trader said.
Spanish 10-year bonds were among the worst hit
by the market reversal, with yields rising back above 5 percent
to stand at 5.06 percent, up 17 basis points on the day.
On Thursday, Spain sells debt maturing in 2015 and 2018 and
will also tap a long-dated bond maturing in 2041. It is expected
to skew issuance towards the shorter-dated bonds that sit within
the scope of possible central bank support.
Italy also announced the launch of a new 15-year benchmark,
testing appetite for longer-term bonds for the first time in
more than two years.
The weight of supply had dealers selling existing holdings
in order to clear space to buy the new debt when it is issued.
Traders also said last week's rally had taken yields to
expensive levels and exacerbated the selloff.
The Italian 10-year bond rose 7 basis points
to 4.19 percent.
German Bund futures also reversed some of their 349
tick fall since prices peaked on Dec. 28, rallying 46 ticks to
settle at 142.77.
An unexpected fall in euro zone factory output gave
investors further reason to buy into safe-haven German debt and
to take profit on last week's rally in Spain and Italy.
"Since the beginning of the year, we had a significant
sell-off (in Bund futures) and there was a bit of a retracement
of that and it was compounded by the industrial production
numbers being weaker than expected," Ricardo Barbieri,
strategist at Mizuho said.
Industrial production in the region sharing the euro fell
0.3 percent in November from the previous month, against a
forecast for a 0.1 percent rise - the latest sign of the euro
zone's economic challenges.
Technical analysts said Bunds were rebounding after testing
key support levels on Friday but that the technical picture
still pointed to further room for declines.
"We hit a big support on Friday which was a price gap that
we left behind from late October on the March contract as well
as a Fibonacci projection support - that's 142.09-141.95 - so we
think near-term the momentum has turned a little higher," David
Sneddon, technical analyst, at Credit Suisse said.
"Our bias though would still be to view strength as
corrective for the time being. We still think the broader risk
is lower still."