* Speculation of increased ECB bond buying lifts periphery
* Weak demand for German debt at auction, in futures market
* Portugal shrugs off rating warning, T-Bill yields rise
LONDON, Dec 1 (Reuters) - Pressure on the euro zone’s higher-yielding debt eased on Wednesday as some traders bet the European Central Bank could step up its bond buying programme and as a poor German bond auction hit Bund futures.
Irish and Spanish bonds outperformed German debt, narrowing their yield gaps over Bunds with some in the market believing there may be further details of the ECB’s bond-buying programme after its rate-setting meeting on Thursday.
Analysts said there was little to suggest an imminent change to the scale of the bond purchase programme introduced in May to stabilise markets, but nevertheless it was a risk that investors positioned for a widening of yield spread could not ignore.
“I wouldn’t say this is a wholesale change of sentiment... (but) this talk will certainly encourage people to take a bit of the short position they’ve got in the periphery off the table,” said Marc Ostwald, strategist at Monument Securities in London.
German Bund futures FGBLc1 hit a session low after a German five-year bond auction received total bids lower than the amount on offer. [ID:nLDE6B00XE]
“Despite the cheapening we’ve seen this morning, apparently there wasn’t too much demand to take the Bobl. Simply, market volatility is keeping a lot of investors on the sidelines,” said Michael Leister, strategist at WestLB.
The contract fell to a session low of 127.04 and erased almost all the previous day’s gains.
The Irish/German bond yield spread IE10YT=TWEB narrowed by 23 bps on the day to 677 bps and the equivalent Spanish spread ES10YT=TWEB was at 273 bps, also 23 bps tighter on the day.
The Portuguese debt shrugged off an overnight warning from ratings agency Standard and Poor's that it could face a credit rating downgrade. The Portuguese/German 10-year yield spread PT10YT=TWEB narrowed 22 basis points on the day to 426 bps. [ID:nN30292510]
Portugal also proved it could still access short-term debt markets with a 500 million euro sale of 12-month T-bills, but the yield demanded by investors rose sharply. [ID:nLIS002518]
WEAK BUND PERFORMANCE
The flight-to-quality resulting from the euro zone debt crisis has had a mixed impact on the 10-year sector of the German curve in recent sessions, reflecting worries over the impact on German finances if further costly sovereign bailouts are required.
“We’re slowly coming round to the view that if the market is picking countries off one-by-one eventually that’s going to have some kind of impact on Germany as well,” said Alan McQuaid, chief economist at Bloxham stockbrokers in Dublin.
The Bund future was last 75 ticks lower at 127.27
The 10-year German bond yield DE10YT=TWEB was 2.696 percent, up 8 basis points while the two-year Schatz yield DE2YT=TWEB was 3 bps higher at 0.889 percent.
Above-forecast German retail sales figures -- showing the strongest growth in almost three years -- also weighed on safe-haven demand.
Editing by Ruth Pitchford
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