May 30, 2013 / 7:58 AM / 4 years ago

EURO GOVT-Italian bonds fall as investors make room for sale

* Italian bonds fall as investors make room for bond sale

* Higher yields expected to entice investors at auction

* Bunds rise after strong sell-off recently

By Ana Nicolaci da Costa

LONDON, May 30 (Reuters) - Italian bonds edged lower on Thursday as investors made room for an auction which was expected to attract decent demand as higher yields made the bonds more attractive.

Italy will offer up to 5.75 billion euros of bonds maturing in 2018 and 2023.

Short-term Italian borrowing costs rose at an auction on Wednesday for the first time since March and long-term yields are expected to edge higher at the sale later this session.

Any rise in borrowing costs however would reflect the recent sell-off in broader euro zone debt driven by the possibility that the Federal Reserve may scale back bond-purchases, analysts said.

“Markets sold off everywhere, not only in Italy. It’s not a sign that there is a particular weakness in the BTP market, it’s a sign that global debt markets sold off over the last couple of weeks,” Patrick Jacq, European rate strategist at BNP Paribas said.

“At current level of yields, (the bonds are) relatively attractive.”

Ten-year Italian government bond yields were 2.8 basis points higher at 4.21 percent, while the Spanish equivalent was up 2 bps at 4.43 percent.

“There was a concession yesterday so I assume it will be fine. I think people are a bit long (have bought) Italy, there might be a bit of supply indigestion around,” he said.

The rally in riskier peripheral debt this year was recently undermined by concerns the Fed may soon begin unwinding a ultra-easy monetary policy program that has underpinned global financial markets by flooding them with liquidity.

The prospect of this exit has also weighed on safe-haven German Bunds but the cheaper debt prices attracted back buyers, also driving the contract higher on the day.

German Bund futures were 18 ticks higher at 143.59, as global equities came under selling pressure overnight. Ten-year yields fell 1.4 basis points to 1.48 percent, having 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,” Jacq said. “We are recommending long (buy) the Bunds at 1.50 (percent) with the target closer to 1.40 for the weeks ahead.”

Investors will get fresh insight into the health of the euro zone economy with sentiment data released later this session.

They will also keep a close eye on U.S. releases, including gross domestic product numbers and initial jobless claims, as they try to gauge the Fed’s next move.

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