* Demand for Spain's first linker tops 20 bln euros
* ECB easing expectations push euro zone yields lower
* Weak US retail sales send Bund yields to 50-week low
* PIMCO sees bull market ending, but bears quiet
(Adds comments, updates prices)
By Marius Zaharia and John Geddie
LONDON, May 13 (Reuters) - Low-rated euro zone bond yields
fell back towards record lows on Tuesday, as a raft of debt
sales met strong demand from investors expecting the European
Central Bank to ease monetary policy further.
Spain's first-ever inflation-linked bond drew bids of more
than 20 billion euros. Italy reached the top of its target
range, selling 7.25 billion euros of debt, while Germany and the
Netherlands also easily dispatched bonds. After those strong
auctions, Italy mandated a bank syndicate for a 20-year sale.
The ECB's outlook drove yields lower and supported demand. A
Dow Jones report quoted unnamed sources as saying the Bundesbank
would back an interest rate cut next month, after ECB President
Mario Draghi said last week the governing council felt
"comfortable" with easing policy in June.
Sources later told Reuters the Bundesbank was ready to
support ECB policy action if it is needed.
Bond fund giant PIMCO said loose central bank policy should
herald an era of low returns but less downside risk over the
next three to five years.
In the report released on the firm's website, Pimco said
that neutral policy interest rates close to zero percent suggest
"an end to bull markets as we've known them, but no perceptible
growling from the bears".
Euro zone bond yields were last 1-6 basis points down,
having started the day flat or a touch higher as investors made
room in their books for the new paper.
Spanish, Irish and Italian yields traded just above the
record lows they reached last week, while Greece was
the only outlier, where yields rose 16bp on the day to 6.42
German 10-year Bund yields, the benchmark for
euro zone borrowing costs, fell 4 bps to a 50-week low of 1.42
percent. Traders said Bund yields also fell in step with US
Treasuries, after weak US retail sales data raised questions
over the strength of the US recovery and the pace of rates rises
in the world's largest economy.
While low official rates have a direct correlation to lower
nominal bond yields, investors said demand for Spain's
inflation-linked debt was based on expectations that looser ECB
policy would eventually succeed in lifting ultra-low consumer
"Inflation linkers ... look like a free option on potential
aggressive action next month," said Marion Le Morhedec, senior
portfolio manager at AXA Investment Managers.
Analysts said Spain's sale of 5 billion euros of
inflation-linked bonds allowed it to tap a hungry domestic base
that until now could hedge against inflation only by buying
German, Italian or French debt.
The possibility that some investors would switch from
Italian linkers into Spanish ones in the near term to diversify
their portfolio raised the prospect of short-term gains in the
Spanish market, luring hedge funds into the sale, traders said.
"Also, everybody expects the ECB to act and anchor inflation
expectations," said Natixis fixed income strategist Cyril
Regnat, who said Spain's debt sale was "quite impressive".
With the linker sale, Spain has now shifted around 51
percent of its end-of-year target for medium- and long-term
debt. Italy has also completed almost half its issuance
programme for this year with Tuesday's sale.
"Spain and Italy are well advanced with their funding for
this year so yields have more room to compress," said Annalisa
Piazza, a marker economist at Newedge.
(Reporting by Marius Zaharia and John Geddie; Editing by Larry
King and Susan Thomas)