EURO GOVT-Top-rated bond rally stalls as new debt absorbs demand


* Non-German rally stalled by 14 billion euro bond supply

* Yields may resume fall if Asian cash inflows materialise

* Some still sceptical over lasting impact of BOJ stimulus

By William James and Marius Zaharia

LONDON, April 9 (Reuters) - A wave of newly-issued euro zone bonds offset a surge in investor demand for non-German bonds and halted a record-breaking rally fuelled by Japan's radical efforts to stimulate growth.

Japan's central bank unveiled a $1.4 trillion stimulus plan last week, prompting speculation that cash will spill over into other regions in search of higher bond yields and assets not denominated in the rapidly depreciating Japanese yen.

This had helped push French, Dutch, Austrian and Belgian bonds yields to record lows.

But, with 14 billion euros of newly-sold bonds hitting the market on Tuesday and some in the market questioning whether the rally was driven by Asian cash or speculators buying in anticipation of its arrival, yields lifted off their lows.

Dutch 10-year bond yields were 6 basis points higher on the day at 1.50 percent, pulling back from last week's record lows of 1.384 percent after a sale of 20-year government bonds. Equivalent Finnish bonds were 4 bps higher on the day at 1.47 percent as the county launched a 4 billion euro syndicated bond issue.

"The massive rally in Finland, France, Holland looks like it has stalled out a bit today," a trader said. "My view is that this is a technical move on the weight of the supply the market has had to take down today rather than anything fundamental."

An 8 billion euro sale of highly rated bonds from the EFSF, the euro zone's bailout fund, was also seen draining demand from secondary markets. Elsewhere, Austria mandated banks for a new 10-year debt issue.

Ten-year German Bund yields rose 2.3 basis points to 1.26 percent while Bund futures fell 28 ticks to 145.80.

Germany is due to auction two-year bonds on Wednesday, and Italy sells long-term debt on Thursday, but beyond that analysts said that the rally could still have further to run if Japanese investors start liquidating their domestic bond holdings.

"I'm a little sceptical on how much is coming through from Japan and how much is hedge funds and speculative accounts anticipating the flow," the trader said.

"But, what the BOJ is doing is unprecedented and huge, which can cause big portfolio shifts and that is certainly the driver of the price action."


However, some investors were reluctant to buy into the idea that euro zone bonds will eventually benefit from Japanese flows.

"We haven't got involved in semi-core markets over the past couple of weeks and it's unlikely that we will," said Sanjay Joshi, head of fixed income at London and Capital, which manages $1.5 billion in fixed income assets.

"Certainly ... Japan's (stimulus) option does change the plan for investors elsewhere as well. But the way I tend to look at it is that the first (to gain) are (U.S.) Treasuries, followed potentially by (UK) gilts ... and Canadian and Aussie bonds before the euro zone."

Joshi said he had recently bought U.S. Treasuries and Canadian bonds, on the view that Japanese investors would regard most euro zone bonds as too volatile to prefer them over other highly-rated markets.

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