* Demand strong at a five-year German debt sale
* Surprise rise in German industrial output caps Bund gains
* Accommodative ECB policy to support peripheral debt
By Marius Zaharia and Ana Nicolaci da Costa
LONDON, May 8 A strong auction of German
five-year bonds and reassurance from the European Central Bank
that it is not a "toothless tiger" lifted Bund futures off
three-week lows on Wednesday.
Portuguese bonds also gained after a strong syndicated
10-year debt sale on Tuesday put it on course to leave its
bailout programme and reinforced appetite for high-yielding euro
Expectations that the ECB may ease policy further led to
gains for both benchmark German Bunds, whose yields are anchored
by official rates, and the debt of vulnerable peripheral
economies which investors buy to maximise returns in a low-rate
With policymakers reiterating the ECB has room to manoeuvre
should the economy worsen further, and Executive Board member
Yves Mersch saying the bank was not a "toothless tiger",
analysts expect euro zone bonds to continue to rally together.
"(Germany) had a decent auction this morning ... and
Portugal's sale yesterday was a success," said Alan McQuaid,
chief economist at Merrion Stockbrokers in Dublin.
"The main theme here is the search for yield and Bunds are
probably going to be supported by the ECB's stance as well, even
if they don't offer much (return) value at the moment."
Bund futures were last 41 ticks higher on the day
at 145.84, off a three-week low of 145.37 hit on Tuesday.
Most gains were made after an auction of new five-year bonds
attracted bids worth 2.1 times the amount on offer, above the
1.875 average for this year. The sale got stronger demand
despite the lower yields of 0.38 percent versus a 2013 average
of 0.498 percent.
Data showing German industrial output unexpectedly rose in
March took the shine off Bunds in the early part of the session,
but the impact was short-lived.
"One data point doesn't make a trend," Michael Leister,
senior interest rate strategist at Commerzbank.
"It's some relief after the poor data of the past month but
the market is going to see whether it's just a one-off or indeed
signals a turnaround in the underlying data flow."
Portuguese 10-year yields were 7 ticks lower
on the day at 5.47 percent, the lowest since September 2010.
Early in 2012, when many investors thought Portugal would follow
Greece and restructure its debt, yields topped 17 percent.
"A market that no one wanted to buy a year or so ago is now
bid very aggressively with much lower yields. That's a pretty
positive sign," a trader said. "There is still more appetite to
buy rather than liquidate (peripheral bonds)."
Spanish and Italian 10-year
yields edged down to 4.10 and 3.84 percent, respectively, not
far from their lowest levels since 2010 hit on Friday.
Merrion's McQuaid said the spread between Spanish and
Portuguese 10-year yields could soon halve to levels of around
70 bps seen earlier this year as demand for high-yielding assets
tightens spreads across the euro zone.