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UPDATE 1-Euro zone bond rally powers on, Portugal auction sets tone for Ireland

Dhara Ranasinghe


* Ireland expected to launch 30-year bond deal this week

* Portugal yields hit record lows at auction

* German Bund yield at fresh 5-week lows

* But Italy bond yields jump 10 bps

* Euro zone periphery govt bond yields (Recasts with latest price action , adds Portugal auction)

LONDON, May 8 (Reuters) - Portuguese, Irish and Spanish bond yields hit fresh historic lows on Wednesday and Portugal saw firm demand at an auction in the latest sign of strong investor interest for long-dated euro zone debt.

In contrast to sharp yield falls across most European bond markets, Italian yields rose on concerns over tension within the ruling coalition.

Portugal sold all 1.25 billion euros ($1.4 billion) of the 10- and 15-year bonds it was offering, with yields at the auction hitting record lows.

Portuguese 10-year bond yields fell to a record low of 1.07 percent ahead of the auction and held close to that level afterwards.

Spain's 10-year bond yield fell to 0.94 percent, its lowest in more than two years and Irish long-dated bond yields dropped below 0.5 percent for the first time since December 2017.

"Because there's still some uncertainty around Italy, while Spain and Portugal are more stable, Spanish and Portuguese bonds continue to benefit," said TD Securities European rates strategist Pooja Kumra.

"There is still strong demand for bonds which is why May has started with strong issuance."

Ireland said on Tuesday it would sell a new 2050 bond via a syndicate of banks and analysts said the deal was likely to come before the end of the week.

A weak economic backdrop and speculation that the European Central Bank (ECB) will keep rates at record low levels for longer than anticipated has sparked a stellar rally in fixed income this year.

Sluggish global growth and a dovish tone from central banks have also helped -- New Zealand's central bank on Wednesday cut interest rates for the first time in 2-1/2 years.

But with yields on higher-rated paper such as 10-year German debt below zero percent, which essentially means investors are paying to hold those bonds, investors have moved into lower-rated markets to secure a yield.

That makes a favourable backdrop for this week's euro zone bond sales, with focus now turning to Ireland.

It's new 30-year bond comes just weeks after strong demand for a new 30-year Cypriot bond.

"We've been getting fairly solid feedback on the long end - not just Ireland - for quite some time now," said a lead manager involved in the Irish deal.

Most euro zone bond yields extended falls sparked by this week's downward revision to euro zone growth forecasts from the European Commission and renewed U.S./China trade tensions.

Germany's 10-year bond yield hit a fresh five-week low at minus 0.059 percent, while British and U.S. long-dated bond yields fell to their lowest since early April .

Italy remained the outlier, with 10-year bond yields jumping 10 bps to 2.689 percent -- pushing the yield gap over Germany to its widest in over two months at 273 bps .

The EC on Tuesday cut its growth prediction for Italy and said its public finances would deteriorate further, in an assessment that could reignite a dispute with Rome over its budget after the two sides reached an uneasy compromise in December.

(Reporting by Dhara Ranasinghe; Editing by Janet Lawrence and Kirsten Donovan)