LONDON (Reuters) - Spain's debt sales next week are expected to draw ample demand from yield-hungry investors although its fundraising momentum is seen slowing after a stellar start to the year.
The European Central Bank's September pledge to buy bonds of countries that ask for aid has helped stabilize euro zone debt markets in recent months, giving investors space to focus on returns.
With that in mind, and with cash to put to work at the start of the year, they have piled into Spanish and Italian bonds.
A recent rise in German yields should underpin demand at its auction next week while Austrian and French sales will benefit from the pick-up they offer over Germany.
"In general, there seems to be reasonable demand for the periphery so I think Spain should be okay getting their auction away," said Elisabeth Afseth, fixed income analyst at Investec.
"You are getting less yield now than what you were a few months ago so ... I think (the rally) could certainly tail off a little bit."
Despite a sharp fall in yields since late July, Spanish debt still offers attractive returns compared to other euro zone paper, and analysts thus expect next week's sale of bonds maturing in 2015, 2018 and 2029 to meet healthy demand.
But given how far Spain's borrowing costs have fallen and how poorly its economy is still performing, analysts predict that appetite will decline somewhat as the year progresses.
Data this week showed the euro zone's No. 4 economy fell deeper into recession in the final quarter of last year.
"We've gotten down to yield levels where you do have to look at the risk/reward skew ... you have to be quite optimistic about the economic outlook to continue buying those bonds," Monument Securities strategist Marc Ostwald said.
"Net supply in January was cash rich - there was more redemption and coupon payments than supply. Going forward, that dynamic is going to change," he added.
The rally in peripheral bonds has not precluded investors from stocking up on lower-risk "core" bonds at auctions.
Indeed, the recent sell-off in German bonds has only made them more appealing by increasing the yield and the return offered to investors.
Against this backdrop, Germany's 4 billion euros sale of five-year debt is expected to meet good demand.
"The yield pick-up is still attractive and you are going into a week where you have the potential for getting a dovish ECB meeting, so all of that should work in favor of a take-up in German paper," said Norbert Aul, rate strategist at RBC Capital Markets.
The ECB holds its regular monetary policy gathering next week. At the last meeting, it sounded more optimistic on the euro zone outlook than some in the market had expected.
Austrian and French debt sales next week are also expected to draw demand from investors seeking safety but with a higher return than offered on German paper.
Austria will issue 1.1 billion euros in bonds by reopening 2022 and 2019 issues in an auction on Tuesday, while France will sell on Thursday 7-8 billion euros of bonds maturing in 2020, 2022 and 2027.
(Graphics by Vincent Flasseur and William James; Editing by Catherine Evans)
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