Bonds News

EURO GOVT-Italy sells bonds to modest demand, Bunds rise

* Bunds rise after solid U.S. Treasury auction

* Italy sells 8 bln euros of bonds to modest demand

* Peripheral bonds post worst performance in years

LONDON, Dec 30 (Reuters) - Italian bond futures rose on Thursday after a sale of government debt which met modest demand in thin year-end markets, while German government bonds were pulled up by a rally in U.S. Treasuries.

Italy sold 6 billion euros of three- and 10-year BTPs, and 2.1 billion euros of floating-rate notes, but yields rose in the challenging liquidity conditions and with concerns over Europe’s debt crisis lurking in investors’ minds [ID:nLDE6BT05E].

“The bid amounts don’t look particularly great...the periphery euro zone countries are under pressure to raise a lot of cash and the market has been heavy as the sovereign confidence crisis is not over so all these auctions are going to be work,” said Luca Jellinek, head of European rate strategy at Credit Agricole.

“This is the first auction that settles in the new year and I think they will continue to be like this with moderate demand and big concessions.”

BTP futures FBTPc1 were 16 ticks higher at 108.81, compared with 108.47 ahead of the sale.

Barclays Capital said both Italian bonds offered for sale on Wednesday had underperformed not only Bunds, but also their Spanish equivalents since mid-December. “Past auction concessions have tended to reverse post the supply and thus we see room for some tightening in the next few days against both other peripherals and versus the...core, especially as liquidity conditions normalise,” it said.

The bank’s strategists added that the three-year bond, trading at a 10 basis point discount to the asset swap curve, was close to the cheapest levels seen for such a bond.

March Bund futures FGBLc1 were 52 ticks higher at 125.29. Two-year German bond yields DE2YT=TWEB were 2 basis points lower at 0.870 percent, with 10-year yields DE10YT=TWEB down 4 bps at 2.97 percent.

U.S. Treasuries rallied, pulling Bunds with them, after a strong seven-year note auction on Wednesday.

The sale followed a disappointing five-year offering on Tuesday and had the highest participation of bidders other than primary dealers since June 2009 as investors extended duration and offset short positions ahead of year-end.

“The low demand scenario didn’t materialise and that provided some room to rally,” WestLB rate strategist Michael Leister said.

German 10-year yields are set to end the year around 40 bps lower than in January after Bunds came under pressure in the fourth quarter as markets priced in a better global economic outlook and worried over the cost to Germany if more indebted euro zone countries need bailing out.

SPANISH YIELDS Spanish 10-year yields have risen almost 150 bps over the year, the most since 1999, according to Reuters data, and Portuguese 10-year yields are up around 270 bps, the most on record, at 6.8 percent.

“We expect the selling pressure on peripheral paper to continue given the underlying fundamental problems of too high funding costs and too low growth are still in place,” WestLB’s Leister said.

Pressure is expected to resume in the new year on Portugal and other euro zone states struggling to address the debt and banking problems at the heart of the region’s debt crisis.

Debt-laden Portugal said on Wednesday a planned steep reduction in its fiscal deficit would enable it to scale back government bond issuance next year [ID:nLDE6BS10J].

“If they come to the market in Q1, the funding costs will be unsustainable and at the end of the day Portugal will also have to request external aid,” Leister said.