January 30, 2013 / 12:00 PM / in 5 years

EURO GOVT-Italian yields rise as market absorbs supply

* Pricing of Italian sale suggests good demand
    * Strong appetite at German 30-year bond auction
    * Outcome of Fed meeting in focus, little new expected

    By Ana Nicolaci da Costa
    LONDON, Jan 30 (Reuters) - Italian government bond yields
rose across maturities on Wednesday as the market absorbed
supply from an auction analysts said showed demand for
longer-dated peripheral debt was improving.
    Italy paid less to borrow over five and 10 years than it had
since October 2010 as investors seeking returns continued to
take comfort from the promise of European Central Bank
intervention and showed little concern about upcoming elections.
    The Treasury raised 6.5 billion euros, the top of its
4.5-6.5 billion euro target range, 3.5 billion euros of which
was 10-year debt. Although the bid-cover of 1.3 was considered
modest, the pricing suggested solid demand, analysts said.
    "What we've been seeing recently is increased demand
particularly from overseas, for Italian bonds, not just the
short end but particularly the longer end... I think today's
auction provides further evidence that is indeed occurring,"   
RIA Capital Markets bond strategist Nick Stamenkovic said.
    Rome paid a yield of 4.17 percent for the 10-year paper,
down from 4.48 percent at the end-December sale and below 4.23
percent in the secondary market around the time of the auction.
Ten-year yields were little changed after the
results, up around 6 bps on the day.
    After the prospect of ECB intervention fuelled a rally in
the short-dated paper which falls within the bond-buying plan's
scope, analysts expect investors to shift towards longer-dated
debt as they search for higher returns.
    "Given the still-ongoing hunt for yield environment, we
would expect more and more investors to be more open-minded also
for longer maturities in the Italian curve," said Rainer
Guntermann, strategist at Commerzbank.
    Against this backdrop, he recommended investors put on
flattening trades on the Italian yield curve or make bets that
longer-dated yields will fall faster than short-dated ones.
    Ten-year Spanish yields were 1.4 bps higher
at 5.18 percent. Data showed Spain's economy sank deeper into
recession in the fourth quarter of last year - a reminder of the
challenges still facing the euro zone.
    The recent cheapening in German debt prices secured strong
demand at a sale of 30-year Bunds, which also tend to be
favoured by institutional investors needing to match long-term
pension and insurance liabilities to secure assets.
    Germany sold 1.637 billion euros of 30-year debt at a yield
of 2.45 percent, higher from 2.34 percent at the last such sale
in October, attracting bids for 1.8 times the amount on offer.
   "The strong overbidding suggests that this was a good auction
result and adds to the current view that the rally in
peripherals is not a zero-sum game, i.e. largely not to the
detriment of the core," said Rabobank strategist Lyn
    In the secondary market, German bond prices were down on the
day as the market absorbed the supply, with 30-year bond yields
 up 1.6 bps at 2.44 percent and the 10-year
yield 2.7 bps higher at 1.72 percent.
    German Bund futures were 34 ticks lower on the day
at 141.48, with technical charts pointing to further weakness.
    The Bund had broken a crucial support level at 141.71 - a
55-week moving average - while the 10-year yield
 has cleared key resistance at 1.7 percent,
leaving the Bund vulnerable from a technical point of view,
Commerzbank's Guntermann added.
    "There seems to be a case for more weakness in Bunds. For
today, we would prefer technical shorts in Bunds," he added.
    With the supply out of the way, investor attention will fall
on the outcome of the Federal Reserve policy meeting which comes
after the European market close.
    The Fed is expected to maintain asset buying at $85 billion
a month and retain a commitment to hold interest rates near zero
until the unemployment rate falls to 6.5 percent, provided
inflation does not threaten to breach 2.5 percent.
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