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First post-default Greek bond starts rewarding investors

* Greek five-year bonds fall below 4.95 pct issuance level

* Bond's market performance key for success of future sales

* Italy raises 20.6 bln in bumper BTP Italia sale (Updates with new prices, Italian debt sale, adds fresh comments)

By Marius Zaharia

LONDON, April 17 (Reuters) - The yield on the first bond Greece has sold since its 2012 default dipped just below its issuance level on Thursday as Athens rejoined a rally in peripheral debt markets after a brief period of selling pressure.

The five-year bond, which drew demand almost seven times its size a week ago, faced a tough market debut as investors used the landmark sale as an opportunity to book profits on the euro zone's best performing bonds this year.

The immediate selling pressure after one of the fastest market comebacks ever from default by a sovereign raised worries that Greece's access to private funding remained at the mercy of come-and-go hedge funds.

The dip back to just below the 4.95 percent issuance yield from levels above 5.1 percent it hit earlier this week suggested that Greece, which is under a 240 billion euros ($331.35 billion) EU/IMF bailout package, might after all be able to count on a more stable investor base in the future.

A strong market performance of the bond, which last traded 12 basis points lower on the day at 4.84 percent, was key to attracting investors to any future Greek bond sales.

"Probably there were a couple of guys on board who expected to have a quick gain and got out ... maybe a bit too early," said Padhraic Garvey, head of investment grade debt strategy at ING in Amsterdam.

"Ideally you want this bond to trade 4.75 or even 4.5 percent to build confidence. You don't want the yield to go up because it leaves a bad taste in the mouth and reduces the chances of success for other deals."

In a further confirmation of improving investor sentiment towards the euro zone's weakest link, National Bank of Greece prepared to be the fourth Greek lender to tap international markets through a share offering on Wednesday. [ID:nL6N0N84BQ[


Analysts said Greek yields fell in line with moves in other lower-rated euro zone bond markets. Yields on Italian, Spanish, Portuguese and Irish bonds traded close to multi-year or even record lows on Thursday.

The possibility that the European Central Bank may eventually have to fight low inflation with asset purchases - or quantitative easing (QE)- increasingly outmuscled any other market drivers for peripheral debt.

Greek 10-year yields last traded at 6.21 percent, having risen from four-year lows of 5.85 percent to just below 6.50 percent in the days after Thursday's bond sale.

Greek yields have dropped some 250 bps so far this year - one of the fastest falls in the world.

"The rally in peripheral bond markets continued unabated this week and I don't see why Greece should go against the tide," said Mathias van der Jeugt, a KBC strategist in Brussels.

Demand for the euro zone's high-yielders was on show in Italy, which raised a total of 20.6 billion euros of BTP Italia inflation-linked bonds. That was just shy of a previous record set last November by a similar bond in what was the largest single bond sale by a European government.

"The explanation (for the large amount) is quite simple. People are now waiting for QE from the ECB," said Jussi Hiljanen, chief fixed income strategist at SEB in Stockholm. ($1 = 0.7243 Euros) (Reporting by Marius Zaharia; Editing by John Stonestreet)