April 23, 2014 / 7:51 AM / 4 years ago

Portugal yields hit 8-year lows as Wednesday's auction whets appetite

* Portugal to resume bond auctions after 3-year hiatus

* Lisbon selling up to 750 mln euro of 10-year bonds

* Yield-hungry investors seen snapping up the debt

By Emelia Sithole-Matarise

LONDON, April 23 (Reuters) - Portugal’s government bond yields hit eight-year lows before an auction on Wednesday of 10-year debt, on optimism around the country’s full return to debt markets after three years.

Investor focus was also on preliminary euro zone manufacturing data, with the French survey showing the private sector expanded at a much slower rate in April, underlining the fragility of the recovery in the euro zone’s No. 2 economy and keeping alive speculation that the European Central Bank will take further stimulus measures, including asset purchases.

Against this backdrop, many in the market expect the Portuguese sale of up to 750 million euros of debt to be snapped up by yield-hungry investors who have driven borrowing costs of the euro zone’s weaker states to multi-year lows this year.

The auction follows a series of syndicated bond sales since early last year and will help show the country can finance itself after its planned exit in May from a 2011 bailout. Lisbon aims to auction bonds once or twice each quarter going forward.

Portuguese 10-year yields fell 6 basis points (bps) to 3.64 percent and further post-sale falls were expected.

“It’s (the auction) going to fly. It’s a very small auction and there’s still demand for yield out there. It all feels okay. We think that probably 3.5 percent for the 10-year yield in Portugal is viable,” one trader said.

Portugal’s bailout is due to end on May 17, and focus is now on whether it will request a credit line to support its post-bailout debt-market funding.

Its return to normal market funding could also help persuade ratings agencies to pull it out of junk territory, some strategists say.

“The ratings from the three main agencies are still relatively deep in non-investment grade territory. This leaves scope for positive rating news at the upcoming rating reviews by Standard & Poor’s and Moody’s scheduled for May 9,” Commerzbank strategists said in a note.

Other euro zone bonds were also firmer, with the core market clawing back the previous day’s losses on the weaker French PMIs. German 10-year yields, the euro zone benchmark, were 2 bps lower at 1.53 percent while French equivalents were 1 basis point down at 2 percent FR10YT-RR. (Editing by Louise Ireland)

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