By Marius Zaharia
LONDON Thu Jan 23, 2014 4:12am EST
LONDON Jan 23 (Reuters) - Spanish bond yields rose further above recent eight-year lows on Thursday as investors sold some of the lower-rated euro zone paper they have been flooded with since the start of the year.
Traders said some investors had sold portions of the 10 billion euros of new Spanish 10-year bonds issued on Wednesday as secondary market yields traded below the yield at which the bonds were placed.
Investors who had not been able to get their hands on as many of the bonds as they wanted on Wednesday were the main buyers in the market on Thursday, suggesting Spanish yields were likely to resume their falling trend.
Spain's sale via a syndicate of banks drew demand of almost 40 billion - a record for European governments.
On the back of an improving euro zone growth outlook, Madrid has sold larger-than-expected amounts of bonds every week since the start of the year, completing 16.6 percent of this year's 133.3 billion euros funding target.
This follows strong sales in Ireland, Portugal and Italy, with Rome due to sell bonds next week as well.
The large amounts of bonds hitting the market may see this year's strong rally in lower-rated bonds pause for a while, especially with the amount of debt to be sold exceeding scheduled repayments in February.
"We've seen a lot of supply but the Spanish deal yesterday showed there is still a lot of demand out there," said Mathias van der Jeugt, rate strategist at KBC.
Spanish 10-year yields were less than one basis point up at 3.75 percent, having risen in the second part of Wednesday's session after the sale to push further away from Monday's eight-year low of 3.65 percent.
Yields of other lower-rated bonds were also unchanged or slightly higher.
"People are fairly long of this stuff (peripheral bonds) so there might be some supply indigestion," one trader said. "But the Spanish deal had incredible demand so there seem to be plenty of buyers out there."
German 10-year Bund yields, the euro zone benchmark, were flat at 1.75 percent.
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