* Germany sells 5 billion euros of five-year paper
* Investors to buy back into cheapened German market
* Peripherals also expected to stay supported
By Ana Nicolaci da Costa
LONDON, May 8 (Reuters) - German Bunds rebounded on Wednesday, with investors expected to snap up five-year German debt at an auction after a recent sell-off cheapened the market.
Market players would also keep a close eye on German industrial output data due to be released later on Wednesday, one day after industrial orders confounded expectations for a drop and rose in March.
Recent data has painted a mixed picture of the euro zone’s largest economy as investors try to gauge the European Central Bank’s next rate move..
“Yesterday we saw a major move, a major drop in the Bund future and I think some are probably taking the lower levels to stock up again,” Christian Lenk, strategist at DZ Bank said.
“The latest cheapening that we’ve seen... is of course supportive for the five-year (sale).”
German Bunds were up 21 ticks on the day at 145.64, having hit a record high of 147.20 last Thursday.
Since then, the Bund has come under selling pressure as the prospect of looser monetary policy favoured investor appetite for risk, buoying global equity markets to record levels in the previous session.
Ten-year German yields were 1.7 bps lower at 1.29 percent - off the 9-month low of 1.15 percent hit on Thursday when the ECB left the door open for more monetary easing including the possibility of negative deposit rates. Five-year yields were down 1.8 bps at 0.37 percent.
ECB President Mario Draghi departed from a prepared speech on Monday to reiterate the central bank’s readiness to cut interest rates again if the euro zone economy deteriorates further.
“I thought he was very dovish indeed and that’s why, given the fact they are going to cut rates again, I just think Bunds are a screaming buy here and I don’t understand why they have sold off as much as they have,” one trader said.
Despite recommending investors to buy dips on safe-haven German debt, market players also expected lower-rated peripheral debt to continue to be supported by an accommodative monetary policy environment.
Strong foreign interest at Portugal’s sale of its first 10-year bond in more than two years on Tuesday also reinforced an improved sentiment towards riskier euro zone debt.
“A market that no one wanted to buy a year or so ago is now bid very aggressively with much lower yields. That’s a pretty positive sign,” a second trader said. “There is still more appetite to buy rather than liquidate (peripheral bonds).”
Spanish and Italian government bond yields were higher on the day, but not far from their lowest levels since 2010 hit on Friday.