EURO GOVT-Spanish bonds recover as investors retire to sidelines
* Spanish 10-year yields end at 5.98 pct, Bunds up 16 ticks * Eyes on outcome of banking audit, Moody's rating review * Funds in survey plan to sell Bunds, but demand robust now By William James and Marius Zaharia LONDON, Sept 28 (Reuters) - Spanish debt ended little changed on Friday, after reversing an initial sell-off, as investors looked to square up positions and retire to the sidelines, awaiting the next moves in the country's struggle to tame its debt problems. Bond markets cautiously welcomed Thursday's stringent Spanish budget plan, seen as paving the way for a bailout request, but lingering uncertainties meant demand for the country's bonds remained subdued. Chief among those unanswered questions are whether and when Madrid will seek external help to tackle its fiscal problems and activate the European Central Bank's bond-buying plan - regarded as a huge step forward in solving the euro zone debt crisis. Furthermore, an independent audit should reveal later on Friday the extent of the damage to Spanish banks from a collapsed property market. Moody's Investors Service is expected to complete its sovereign rating review by the end of the month. "It makes a lot of sense to see a bit of repositioning here, people taking off short-term positions and getting flat ... I wouldn't take a long position into this weekend," said David Keeble, global head of fixed income strategy in New York Spanish 10-year yields were little changed on the day at 5.98 percent - below their July peak of 7.8 percent but still at an uncomfortably high level that threatens the country's ability to issue bonds. Moody's could push Spain's ratings below investment grade into so-called 'junk' territory, which could trigger a wave of selling from investors whose funds are pegged to benchmark indexes. Moody's currently has a Baa3 rating on Spain, one notch above 'junk'. "HOSTAGE TO POLITICIANS" The Spanish treasury opted to sell short-term bonds, mostly covered by the ECB's potential bond buying, at next week's auction due to scant demand for longer-term issues. Peter Allwright, head of absolute return on rates and currency at RWC Partners, said he was staying away from Spanish bond markets. His instinct was to short Spain, but the prospect of ECB bond-buying made him cautious about doing so. "You're hostage to politicians, which is very hard to trade on. If you trade on economics, they are uniformly bad," said Allwright, whose group manages assets worth $5 billion. "But also you don't try to fight central bankers until you know you can win." Safe-haven German Bund futures were 16 ticks higher on the day at 141.73, benefiting from end-quarter buying to secure low-risk assets for banks balance sheets. Some 62 percent of the funds that responded to a Reuters poll said they planned further cuts to their German Bund holdings as a result of the ECB plans. But RWC Partners' Allwright expected Bunds to remain broadly supported even if the ECB started to buy Spanish bonds as major central banks are likely to keep their monetary policies relaxed for a prolonged period.
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