March 13, 2019 / 11:56 AM / in 5 months

UPDATE 2-Portuguese yields hover near historic low after auction

* Portugal to sell seven-, 10-year bonds before ratings review

* Italy, Germany also hold bond auctions Wednesday

* Brexit uncertainty supports safe-haven debt

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates pricing)

By Dhara Ranasinghe

LONDON, March 13 (Reuters) - Portugal’s 10-year bond yield held near its lowest in at least 25 years on Wednesday, pinned down by firm demand at a bond sale amid expectations of a ratings upgrade this week.

Brexit uncertainty continued to drive broader markets. Yields on 10-year German bonds, viewed as one of the safest assets in the world, were a touch higher but within sight of more than two-year lows hit last week.

Italian yields rose, reflecting the general risk-off sentiment in world markets.

Portugal sold all 1.25 billion euros ($1.41 billion) of seven- and 10-year bonds on offer at an auction, with the yields on the benchmark 10-year bond falling from the previous auction last month to record lows.

Italy also sold the top planned amount of 7.75 billion euros in bonds at an auction. It sold three-, seven-, and 20-year nominal bonds with bids totalling 1.44 times the amount sold. Some 4 billion euros of Italian coupons expiring also helped demand.

Analysts said the bond sales couldn’t come at a better time. Last week, the European Central Bank put off a rate increase and offered a fresh round of cheap loans to banks, prompting an outperformance of southern European bond markets.

Portugal has also benefited from talk that S&P Global may lift the country’s ratings at a review on Friday. S&P rates Portugal BBB- with a positive outlook.

“Investors are searching for yield and the macro fundamentals are very supportive - lower growth, lower inflation,” said Neil MacKinnon, global macro strategist at VTB Capital.

“That’s why the periphery is doing well - southern European bond yields are going lower and I think that will continue.”

Portugal’s 10-year bond yield was steady at 1.35 percent , having edged up ahead of the auction. It fell to 1.308 percent on Tuesday, its lowest in at least 25 years.

At around 127 bps, the gap between Portuguese and higher-rated German bond yields is close to its tightest since last May. The Spanish/Portuguese 10-year spread, meanwhile, is nearing just 10 bps.

“The long-end (Portuguese) outperformance suggests that markets are increasingly looking for an upgrade by S&P to BBB this Friday,” said Michael Leister, a rates strategist at Commerzbank.

Brexit disarray supported higher-rated bond markets.

British lawmakers on Tuesday again resoundingly rejected Prime Minister Theresa May’s proposed agreement on terms for Britain’s planned exit from the EU. Parliament must now decide whether to back a no-deal Brexit or seek a last-minute delay.

Germany’s 10-year bond yield was up just 0.5 bps at 0.065 percent, still close to its lowest since late 2016.

Reporting by Dhara Ranasinghe Editing by Mark Heinrich

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