January 16, 2013 / 5:00 PM / in 5 years

EURO GOVT-German debt holds firm after strong auction

* Bund demand solid after well-bid 10-year auction
    * Higher yields tempt investors back into core debt
    * Periphery rally stalled by weight of new bond supply

    By William James and Marius Zaharia
    LONDON, Jan 16 (Reuters) - Appetite for German debt held
firm on Wednesday as yields near the top end of their recent
range kept buyers interested, helping Bund futures retain this
week's sizeable gains.
    The demand for an auction of new 10-year paper, an asset
perceived as a safe haven, indicated room for German yields to
rise was limited in the near term.
    The 4 billion-euro sale of a bond maturing in February 2023
 drew bids worth 1.7 times the amount on offer,
compared with 1.5 at a similar sale in November and an average
of 1.39 in 2012. 
    Bund futures were one tick higher on the day at
143.30, having already clocked up gains of more than a full
point since Friday's close. Ten-year cash yields 
were flat at 1.50 percent.
    "Germany had a decent auction today, showing that people are
relatively happy to buy Bunds when they get at 1.50-1.60
(percent levels in yields), one trader said.
    "There are opportunistic buyers, people who have to hold
Bunds in a certain portion of the portfolio. But there's also a
feeling in the back of people's minds that some of the stresses
in Europe may come back at some point."
    A post-auction rise in Bund futures up to 143.64 was erased
by better-than-expected earnings by some U.S. banks, which
dented appetite for low-yielding assets, another trader said.
    Bunds and lower-rated debt have moved in tandem on several
occasions this year, as investors - encouraged by the safety net
offered by the European Central Bank's bond-buying programme -
sprayed cash across the whole euro credit spectrum. 
    German bond prices have recovered around a third of the big
fall seen at the start of the year when relief over a U.S.
fiscal deal prompted greater risk taking. Worries about the next
leg of the U.S. budget debate - a battle to raise the country's
debt limit - have resurfaced, lending support to safe havens.
    The technical outlook for German debt was less positive,
with analysts not convinced that the rise seen this week marked
a new upward trend for Bund futures.
    "As impressive as this move has been, there is still no
evidence of any bullish reversal patterns forming," said Richard
Adcock, technical analyst at UBS.
    "While the rally can be extended further over the short
term, our main resistance focus is the 38 percent retracement of
the late December/early January selloff at 143.49 and we will
watch how this is defended over the coming days."
    Yields inched higher among the euro zone's lower-rated
sovereigns, where a busy start to 2013 in terms of new debt
issuance has stalled a new year rally.
    Spain is due to issue up to 4.5 billion euros of bonds on
Thursday. That will be a closely-watched sale as investors try
to gauge whether the country can make it through the year
without turning to international lenders for help.
    After a strongly subscribed 15-year bond syndication on
Tuesday, Italy said it could issue its first 30-year bond in
more than three years in 2013. 
    Spanish 10-year bond yields were 2 basis points higher at
5.05 percent while the Italian equivalent was 2
bps lower at 4.18 percent.
    "It's not really surprising that markets are looking for a
bit of a concession ahead of the Spanish auction tomorrow and
obviously we've had the auction in Italy, which led to a bit of
caution," said Nick Stamenkovic, strategist at RIA Capital
     Portugal sold all 2.5 billion euros of Treasury bills on
offer on Wednesday and yields fell sharply, increasing chances
the bailed-out country will stage a successful return to the
longer-term bond market this year.

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