January 9, 2019 / 11:27 AM / 6 months ago

UPDATE 2-Storming demand for euro zone bond sales spark rally

* Ireland and Portugal sell 8 bln euros of 10-year bonds

* Investors pour in 40 bln euros of orders for those two

* Euro zone yields drop 2-7 bps across the board

* French consumer confidence lowest in four years

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Rewrites throughout to reflect change in bond prices)

By Abhinav Ramnarayan and Dhara Ranasinghe

LONDON, Jan 9 (Reuters) - Euro zone bond yields dropped across the board after strong demand for bond sales from Belgium, Ireland and Portugal brought cheer to investors who had been worried an avalanche of supply could trigger volatility in the bond market.

Ireland and Portugal were set to raise 4 billion euros each from bond investors on Thursday, after generating over 40 billion euros of demand between them.

This came after Belgium on Tuesday priced a 6 billion euro 10-year issue and notched up its highest ever order book of 28.5 billion euros, the country’s debt agency said in a note to investors seen by Reuters.

“The syndications we have seen from Ireland, Belgium and Portugal have been very well subscribed, so whatever concern there was about supply indigestion or that it would need a concession price have disappeared,” Rabobank strategist Richard McGuire said.

Debt agencies often offer a “new issue concession” to get deals sold, which often has the effect of pushing yields higher in the market as bond prices adjust accordingly.

However, the strong demand meant these three countries did not appear to be offering much of a concession at all.

As a result, euro zone bond yields dropped 2-7 basis points across the board on Wednesday. This is particularly significant as yields often rise when new supply hits the market as investors sell outstanding bonds to make room for the new sales.

Southern European debt led the way, with the yield on Portugal’s 10-year bond dropping 4 bps to 1.79 percent and Spain’s 10-year bond yield dropping 3 bps to 1.497 percent.

But Italian debt was the best performer on the day, with 10-year yields lower 6.5 bps at 2.9 percent. The closely watched Italy/Germany 10-year bond yield spread tightened to 267 bps.

Generally speaking, euro zone government bond yields have been compressed in recent weeks on poor economic data from the bloc, and there was further news in this regard on Wednesday.

German imports fell unexpectedly in November, outstripping a drop in exports and widening the trade surplus, in a further sign that Europe’s largest economy is likely to post meagre growth in the fourth quarter of 2018.

French consumer confidence fell in December to its lowest since November 2014, putting more pressure on the euro zone’s second-biggest economy, which has been hit by anti-government protests.

At the same time, the weak economic backdrop and risk factors such as Britain’s departure from the European Union continue to lend support to higher-rated bonds in the bloc.

“Outright yield levels are low but that doesn’t mean there is not demand for bonds,” said Martin van Vliet, senior rates strategist at ING.

“The overall backdrop for the economy is not as gloomy as feared but there are still potential risks out there such as Brexit.”

German 10-year Bund yields dropped 2 bps on the day to 0.21 percent but still above more than two-year lows hit last week of around 0.15 percent.

Germany also sold around 3.18 billion euros of a new 10-year bond in an auction that saw strong demand despite the low yield of 0.29 percent on offer.

Reporting by Abhinav Ramnarayan and Dhara Ranasinghe; Editing by Alison Williams

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