May 30, 2013 / 3:57 PM / 4 years ago

EURO GOVT-Italian yields fall as debt sale goes well

* Italian bonds rise after decent auction

* Italy sold at the top end of target, yields rose

* Bunds rise after recent sell-off

By Emelia Sithole-Matarise and Ana Nicolaci da Costa

LONDON, May 30 (Reuters) - Italian bond prices rose on Thursday after Rome sold the maximum amount of debt it aimed to offer at its month-end auction with investors enticed by a recent back-up in yields.

Italy sold 5.75 billion euros of five- and 10-year bonds even though borrowing costs rose and demand was lower than this year’s average for similar bond sales.

Analysts said the rise in borrowing costs reflected the recent global move driven by the possibility that the Federal Reserve may taper bond purchases in coming months if the economy keeps improving, rather than any concerns related to Italy.

“The relative cheapness of both lines versus the Italian curve might have supported demand at today’s auction,” said Annalisa Piazza, a market economist at Newedge Strategy.

“However, risks of further volatility in the EMU periphery’s spreads has put a lid on demand as investors seem to be sceptical on future movements, ahead of the ECB (policy meeting) and U.S. NFP (non-farm payrolls report) next week.”

Italian 10-year yields were last 8 basis points down at 4.10 percent, having risen in early trade before the auction. Spanish bonds also recovered early losses, with yields last trading 6 bps lower at 4.35 percent.

RECOVERING BUNDS

While Italian borrowing costs have risen in recent days along with those of other euro zone issuers, they are still well below the near 7 percent levels hit at the height of the crisis last July before European Central Bank President Mario Draghi vowed to do whatever it took to save the euro.

Some in the market expect the ECB’s as yet untested bond- buying backstop to keep underlying demand intact for peripheral bonds though the pace of outperformance against German Bunds is seen slowing after their sharp rally earlier this year.

“The compression in yields that we got in some parts of the curve prevents much further downside to peripheral yields especially now the picture in the U.S. is improving in one way or the other and as the recovery consolidates,” said Gianluca Ziglio, head of fixed income research at Sunrise Brokers.

The Fed’s ultra-easy monetary policy programme has underpinned global financial markets by flooding them with liquidity and the first hints of an exit have also weighed on safe-haven German bonds. But cheaper debt prices lured back buyers, driving Bunds higher on the day.

German Bund futures rose 32 ticks to settle at 143.73, and 10-year yields were 2.5 basis points lower at 1.47 percent. The yields hit their highest in nearly three months on Wednesday at 1.519 percent.

“When we look at domestic factors - activity, inflation, unemployment - conditions are still in place to have lower (German) yields,” said Patrick Jacq, European rate strategist at BNP Paribas in Paris.

“We are recommending long (buy) the Bunds at 1.50 (percent) with the target closer to 1.40 for the weeks ahead.”

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