Spain, Italy yields drop on easing supply pressure

Spanish and Italian government bond yields dropped on Friday and were seen falling further as supply pressure eased after large debt sales earlier this week. The prospect of central bank policies remaining ultra-easy for months, despite debate over whether the Federal Reserve might slow its bond buying, has propped up demand for higher-yielding assets in recent months.
---- Spain to auction more bonds next week
In the past week, however, markets had to absorb 7 billion euros worth of Spanish 10-year debt and 6 billion euros of Italian 30-year bonds and that has pushed yields higher in the two countries. With the unscheduled supply pressure out of the way, the rally in peripheral debt is expected to continue at least until Federal Reserve Chairman Ben Bernanke's testimony before the congressional Joint Economic Committee on Wednesday.
"As long as we don't get Bernanke saying that he's going to taper off (asset purchases) next week the path of least resistance is still for lower yields in the Italian and Spanish market," said David Keeble, global head of fixed income strategy at Credit Agricole. "We're going to get down to the lows that we saw a couple of weeks ago."
Spanish 10-year yields were 9 basis points lower at 4.22 percent, while equivalent Italian yields were 8 bps down at 3.90 percent. Earlier in May, they hit 2-1/2 year lows of 3.95 and 3.68 percent, respectively. Spain will sell bonds maturing in 2016, 2018 and 2026 next week, with Barclays expecting issuance to total 4 billion euros. The auctions are part of the regular schedule and are not expected to cause significant selling pressure in secondary markets.
German Bunds briefly hit one-week highs on Friday, with traders citing talk the European Central Bank was checking with some banks whether they were ready for a potential cut in its deposit rate to below zero. German Bund futures were last 13 ticks higher on the day at 145.44, having risen as high as 145.74 earlier in the session. Two-year German yields - the most sensitive to shifts in interest rate expectations - were back below zero percent at minus 3 basis points. Greek bonds were among the market's standout performers with 10-year yields down 38 bps at 8.29 percent as investors priced out the risk of another default after Fitch Ratings raised Greece's credit rating on Tuesday.