Euro zone bond rally rides into supply wave

By John Geddie

LONDON (Reuters) - A sharp rally in euro zone bonds moved into its fourth day on Thursday, with central banks forging ahead with QE purchases and a wave of new debt sales expected to attract strong demand.

Spain, Italy and Ireland will sell up to 13 billion euros of new debt across a range of maturities, helping to soothe fears of a scarcity of bonds after the European Central Bank began its 60 billion euro-a-month government bond-buying scheme this week.

Bank analysts urged investors to use today's auctions to add to their stock of long-dated bonds, with the ECB's scheme expected to see them outperform.

"Buying 10- to 30-year bonds has been the top trade so far and I don't think there is any reason for that to change," said DZ Bank strategist Daniel Lenz.

Before the auctions government bonds across the bloc were seen moving lower, many touching fresh record lows, with national central banks heard to be active in the market.

Normally yields tend to move higher ahead of auctions as investors sell bonds in secondary markets to make room in their portfolios for the new supply.

But the ECB's rapid start to its scheme has had the overriding influence on markets. One of its top policymakers Benoit Coeure said the ECB had bought 9.8 billion euros in assets so far, with an average maturity of nine years.

Italian and Spanish 10-year yields were down 4 basis points at 1.09 and 1.06 percent, while 30-year yields in both countries were down over 10 bps at 1.87 and 1.85 percent, respectively.

Ireland's were down 2 bps at 0.70 bps while Germany's, the euro zone benchmark, were flat at 0.21 percent.

Spain will sell between 4 and 5 billion euros of bonds maturing in 2020, 2022 and 2025, with results due out just after 0930 GMT.

Italy will sell up to 7.25 billion euros of 2018, 2022 and 2046 bonds, while Ireland will tap its 30-year bond for the first time at auction looking to raise 1 billion euros. The results for both auctions are due around 1000 GMT.

Commerzbank said the auctions presented an opportunity for investors to buy 10- and 30-year bonds with yields that should fall faster than shorter-dated bonds.

This so-called curve flattening is seen as one of the best trades under quantitative easing, as buying from central banks forces investors to buy longer-dated bonds in search for yield. As a result of this wave of demand, the are expected to outperform.

Commerzbank expects the gap between Italy's 10- and 30-year bonds to fall to 70 basis points, from around 78 bps at present.

The supply will also add to the eligible stock of debt that can be purchased under the ECB's programme, amid concerns that vanishing yields and a reluctance from some investors to sell could thwart the scheme.

Germany's central bank may soon find there are not enough Bunds in the market for it to meet its share of European Central Bank sovereign bond purchases.

(Editing by Toby Chopra)