* Demand for new 10-year bond near 40 bln euros-IFR
* Large coupon and debt repayments support sale
* Easy ECB policy outlook supports German debt sale
By Emelia Sithole-Matarise and Marius Zaharia
LONDON, Jan 22 (Reuters) - Spanish yields fell back near eight-year lows on Wednesday as the sale of a new 10-year bond drew bumper demand, supported by an improved growth outlook and reinvestments of large coupon and debt repayments.
Spain issued 10 billion euros of a new 10-year bond via a syndicate of banks in a sale which drew bids of almost 40 billion euros, a record among European governments.
“Demand was extremely good ... Investors are coming back to European bond markets big time,” said Laurie Haelikkie, a fixed income strategist at SEB. “Definitely you can say that all the euro zone break-up hassle ... is gone. Confidence is returning fast to the euro zone.”
Spanish 10-year yields were last flat at 3.74 percent, having retreated from an intra-day low of 3.68 percent that was just above Monday’s eight-year low of 3.65 percent.
Spain was rated triple-A the last time its bonds were trading at those levels in 2006.
Traders said the large size of the issue was causing some indigestion in the market - hence the bounce in yields in the second part of the session - but this could be temporary as Spain might be able to curb its issuance in coming weeks.
Madrid has set off its 2014 funding programme at a cracking pace. With improved demand for higher-yielding euro zone bonds spurred by a brighter growth outlook, more positive ratings reviews and hefty bond repayments, it has been selling bonds every week since the start of the year.
The syndicated sale comes after an auction of 5.9 billion euros of 2017, 2026 and 2028 debt last week.
With Wednesday’s sale, Spain said it has already met 16.6 percent of its aim to sell 133.3 billion euros in medium- and long-term bonds this year, up from 128.4 billion last year.
Analysts said demand was also boosted by coupon and debt repayments worth 12 billion euros due from Madrid in coming days and increasing market expectations the European Central Bank will loosen policy further to support growth.
Some in the market say that if the current pace of sales is maintained next month when bond supply is expected to surpass repayments, this could torpedo the rally.
“January has been quite a successful month based on cash flows with huge amounts of redemptions and coupon payments coming to the market which made for negative net supply. That won’t be the case for February and the risk now is for wider spreads,” said ING strategist Alessandro Giansanti.
Increasing bets the ECB will cut interest rates further to counter a rise in short-term money market rates and support the economy from potential deflation also spurred demand at a German two-year bond auction.
Two-year yields were steady at 0.17 percent, having re-tested six-week lows around 0.63 percent on Tuesday on the ECB outlook and expectations that short-term money market rates will retreat from recent peaks.