Wed Nov 6, 2013 4:36am EST
* Italy to close inflation-linked bond retail sale early
* Retail debt sale sets new record above 18 billion euros
* Sale seen easing Italy funding pressure
* Rest of euro zone debt edges up but still edgy over ECB outlook
By Emelia Sithole-Matarise
LONDON, Nov 6 (Reuters) - Italian bond prices rose on Wednesday after bumper demand at a sale of retail inflation-linked bonds reduced the country's funding needs for the rest of the year.
Comments by a top U.S. Federal official overnight saying the Fed should wait for the economy to gain momentum before trimming its bond purchase stimulus in general helped euro zone debt recover from a selloff a day earlier.
The market was knocked lower on Tuesday by doubts over whether the European Central Bank would send a strong signal this week of an imminent cut in interest rates despite a sharp drop in euro zone inflation.
The Italian retail sale has already raised over 18 billion euros since its launch on Tuesday, prompting the Italian Treasury to say it would close the deal at 1200 GMT on Wednesday, more than two days earlier than planned.
The Treasury had mooted a sale of just 10 billion euros of the paper but it now looks set to top a similar issue last year that was the biggest single debt sale by a European government ever.
Italian 10-year yields were last 4 basis points down at 4.14 percent, slightly outperforming other euro zone bonds. Equivalent Spanish yields were 2 bps lower at 4.09 percent.
"Italy is getting huge success with the BTP Italia sale ... That's huge support for the Treasury and points to strong support from institutional investors and it can allow the Treaury to pre-finance 2014 borrowing," said ING strategist Alessandro Giansanti.
Italy has already met almost 90 percent of the roughly 470 billion euros it needs to borrow this year and analysts say the successful retail bond sale could allow it to cut bond auction sizes for the rest of the year.
This strong financial position and expectations the ECB could loosen monetary policy further is allowing Italy to fend off pressure from political tensions before a Senate vote on whether to expel ex-premier Silvio Berlusconi from parliament.
FED SIGNALS
There was support for bond markets in general from comments from San Francisco Federal Reserve President John Williams overnight. He said that the U.S. central bank should wait for stronger evidence of growth momentum before trimming its $85 billion monthly bond-buying.
German Bund futures were last 11 ticks up at 141.26, having fallen more than 70 ticks the previous day as players judged the market might have gotten ahead of itself in expecting a strong signal from the ECB or even an actual rate cut.
A Reuters poll showed only one of 24 traders surveyed expected the ECB to cut interest rates on Thursday.
On Wednesday, cash German 10-year yields were 1 basis point lower at 1.74 percent with some traders saying the previous day's sell-off might have been overdone.
"Maybe the market got speculatively long ahead of the ECB and so we had a bit of a shakeout yesterday but I don't think positioning is excessive," one trader said. "We still think there's still a chance of a rate cut tomorrow although I don't think that's priced in to the market."
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