* Bunds tick lower as concession builds into auction
* Italy election, relative value to ensure smooth sale
* Spanish yields steady ahead of wave of bond supply
By William James
LONDON, Feb 20 (Reuters) - Bund futures dipped on Wednesday ahead of a 10-year bond sale but the rise in yields, as well as caution in the run up to Italian elections, was likely to ensure solid demand.
Bunds have settled into a well-defined range since overcoming a sell-off at the start of this year when investors poured cash into high-yielding markets like Italy and Spain.
Traders say European investors are not prepared to go out on a limb in either direction in the days remaining to the Italian polls on Feb. 24-25. But a positive overnight performance for share markets put safe-haven Bunds on the back foot.
“All in all it makes sense to see the Bund in a tight range at the moment, perhaps with some concession ahead of the auction weighing today,” said BNP Paribas rate strategist Patrick Jacq.
German Bund futures fell 25 ticks to 142.57, but remained well within the 143 to 142 range that has limited price moves for the last two weeks and dealers said the auction should draw healthy demand. Results are due at 1030 GMT.
“I think the auction will go relatively well. Outright the Bund can be considered expensive but relative to Treasuries, peripherals and in asset swap terms it’s not that expensive,” Jacq said
Despite worries that Italy may end up with a fragmented parliament and less focus on reform, its bond yields were slightly lower on the day, continuing a pattern of confident buyers emerging to take advantage of price dips.
Ten-year Italian yields were 2 basis points lower at 3.39 percent.
DZ Bank said shorter-dated Italian bonds looked attractive at the moment as overall market sentiment improved and in anticipation of a fresh rally if former Prime Minister Silvio Berlusconi’s election campaign ends in defeat.
Elsewhere among the region’s struggling peripheral states, Spanish 10-year bond yields were 2 bps lower at 5.19 percent ahead of a wave of supply expected to hit the market in coming days.
On Thursday Spain will sell up to 4 billion euros of conventional bonds and the sovereign has also appointed banks to lead a sale of dollar-denominated debt.
Traders said Spanish yields could rise ahead of Thursday’s auctions as dealers look to sell existing holdings to make room for the new issues and nudge prices lower to ensure they get a better deal at the sale.
The dollar bond issue would be the first by Spain since September 2009 and will enable Madrid to diversify its investor base and tap into the largest community of yield-hungry emerging markets funds.
Commerzbank estimated that market conditions would make the dollar deal only marginally cheaper than issuing in euros, but would be taken as another positive step towards meeting its 2013 funding requirement.
“Besides the small funding arbitrage, the deal would also come along with some relief on the conventional (Spanish government bond) supply front for this year, as Spain has to sell another record-high amount,” the bank said in a note.
Spain has so far raised 22.7 billion euros of a 121 billion target.