Spanish, Irish bond yields hold near multi-year lows

LONDON: Spanish and Irish government bond yields hovered near multi-year lows on Wednesday as the euro zone's lower-rated debt consolidated this year's rally on expectations of a pick-up in economic growth.

Bumper demand on Tuesday for Ireland's first debt sale since the country exited its EU/IMF bailout fuelled interest in debt issued by the peripheral nations that investors have been wary of investing in since the euro zone debt crisis erupted in 2010.

This year's economic data releases have particularly impressed in Spain, where the services sector grew at its fastest pace in 6-1/2 years in December and the number of unemployed fell by a record 2.24 percent in the same month. Spanish 10-year yields were last 1 basis point higher on the day at 3.82 percent, having hit their lowest since late 2009 at 3.798 percent on Tuesday after a roughly 35 bps fall this year.

Madrid will spell out its funding plans for 2014 on Wednesday.

There have been encouraging signs through much of the euro zone region and expectations that the European Central Bank will keep interest rates low for a long period or even cut them more, further supported high-yielding debt.

"It seems that the downside risks have been forgotten," said Jan von Gerich, chief fixed income strategist at Nordea in Helsinki.

"We're either going to have a strong economy or a central bank doing more.

The momentum certainly seems strong."

The ECB meets on Thursday, but it is expected to hold fire on policy and only reiterate that it is ready to ease further if needed.

Irish yields were flat at 3.29 percent, having hit eight-year lows of 3.26 percent on the back of a strong sale of 3.75 billion euros worth of 10-year bonds on Tuesday.

"We're seeing very solid buying going on in the periphery and it's very hard to fight the flow, there are no real sellers at the moment," one trader said. "We're thinking Spanish 10-year (yields) can fall to 3.5 percent (before investors book profits)."

The biggest rally this year was seen in Portugal, where 10-year yields fell 60 bps since the end of 2013 as investors bet that it could follow in Ireland's footsteps and successfully exit its own bailout in a few months. That would require it to replicate Dublin's success at a bond sale.

Portugal has not scheduled such a sale yet but is widely expected to do so, with analysts saying sovereign issuers should take advantage of the current sentiment with large syndicated debt sales.

Some say an avalanche of supply might slow down or even reverse part of the rally in lower-rated debt.

"That is something to be wary about," Nordea's von Gerich said. "When we get the next announcements of a syndicated debt issue in Spain, Italy or Portugal that will affect the market."

Ten-year Portuguese yields were flat at 5.425 percent. Italian and Greek yields were also little changed after 25-50 bps falls this year.

In the higher-rated euro zone countries, German 10-year Bund yields were 1 bps higher at 1.90 percent.

Investors will closely watch the ADP jobs report in the United States later in the day to see if global growth expectations ffor 2014 are justified or not.