EURO GOVT-Little relief despite strong Portuguese bond sale

* Little easing of tension despite strong peripheral auction

* 10-yr yields dip at Portugal’s 1.25 bln euro sale

* Focus turns to Thursday’s Italian, Spanish debt sales

* Markets still looking for credible solution to crisis

By William James

LONDON, Jan 12 (BestGrowthStock) – Portugal’s closely-watched debt
auction found healthy demand from investors on Wednesday,
although there was little sign that markets saw the result as a
turning point in the euro zone crisis.

The average yield at auction on Portugal’s 10-year bond fell
compared to a previous sale in November, confounding some
expectations that rates would top 7 percent for the first time
in the history of the euro zone. [ID:nLDE70B15O]

“These are good results. The drop in the yield is not that
unexpected given what’s been going on in the secondary market,
said RBS rate strategist Harvinder Sian.

Cash market yields on Portuguese debt have come under
pressure since the start of the year, but reported European
Central Bank buying has seen rates fall this week.

“6.8 percent is still not too good, though. It’s a rather
high cost,” Sian said.

Markets took the auction result in their stride, with little
tightening in the Portuguese/German 10-year yield spread, last
at 400 bps, and only a mild selloff in safe-haven Bund futures.

“All the Portuguese auction does is buy a little bit of time
for Portuguese authorities. It certainly doesn’t rule out the
fear that they will have to ask for a bailout,” said Jane Foley,
strategist at Rabobank.

Bund futures hit a session low of 125.14 after the auction,
down 65 ticks, as some investors sold the euro zone benchmark,
which typically benefits from heightened tension in the region.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Take a Look on euro zone crisis [ID:nLDE6T0MG] Graphic on euro zone's struggle with debt http://r.reuters.com/hyb65p ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Many see 10-year borrowing at levels around 7 percent as
unsustainable in the long term, with the vast majority of
economists believing Portugal will become the third euro zone
state in less than a year to ask for a bailout. [ID:nLDE706084]

“Essentially the Portuguese economy is in a weak state and
they’re facing punitive financing rates, so the likelihood is
they will need to access the (European Financial Stability
Facility) in the coming months,” said Nick Stamenkovic,
strategist at RIA Capital Markets in Edinburgh.

ITALY, SPAIN NEXT

With Portugal’s auction completed and no escalation of
market tension, focus turned to bond sales from other euro zone
members struggling with large debt piles.