EURO GOVT-Spanish yields rise on bailout doubt, ECB eyed

Thu Oct 4, 2012 7:24am EDT

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* Bunds stable before ECB meeting, Spanish yields rise

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By Marius Zaharia

LONDON, Oct 4 (Reuters) - Spanish bond yields rose on Thursday with investors still nagged by uncertainty over when Spain will seek a bailout, even though the country was successful in finding buyers for its debt at an auction.

Spain sold just shy of 4 billion euros of three bonds on Thursday, with higher demand than at previous auctions and yields falling on two of them.

German Bunds were little changed as the European Central Bank was seen keeping policy steady at a rate-setting meeting later on.

The auction in Spain signalled that investors are confident that Madrid will request a bailout at some point, paving the way for the ECB to buy its bonds and lower its borrowing costs.

But while demand at auctions -- generally dominated by domestic investors -- remains strong, traders said activity in secondary markets was subdued, with most foreign investors staying on the sidelines.

Analysts warn that markets may soon lose their patience.

"Markets are going to continue to oscillate around news and rumours of a Spanish bailout," RIA Capital Markets bond strategist Nick Stamenkovic said. "Certainly after regional elections (in late October) markets will start testing the resolve of the Spanish government."

Spanish 10-year bond yields were last 8 basis points higher on the day at 5.90 percent, a high level that indicates market discomfort with the perceived lack of urgency in addressing the country's debt pains.

On Tuesday, Prime Minister Mariano Rajoy said a European bailout package was not imminent.

HOLDING FIRE

The uncertainty about the timing of a bailout request has kept bond markets in a tight range in recent days. No strong impulse is expected from the ECB meeting either, with the bank expected to hold its main reference rate at a record low 0.75 percent.

Some economists expect the ECB to cut rates further by the end of the year and may look for signals on future policy moves from President Mario Draghi in his news conference at 1230 GMT.

The impact of that would be limited, however, as investors would be reluctant to bet on any firm gains in German Bunds given the possibility of Spain asking for aid at any point - a move which could dampen appetite for safe-haven assets.

"It doesn't seem like there is a lot of conviction on what the next trade is out there and positioning is pretty square," one trader said.

He said the focus of Draghi's news conference would be Spain, but analysts said he is unlikely to say anything other than that he is waiting for struggling euro zone members to make a request for aid before the ECB will consider any intervention.

"They showed their cards the last time," said Brian Barry, fixed income analyst at Investec.

Bund futures were 1 tick higher on the day at 141.60. Investors will also focus on jobless claims data due out of the United States on Thursday and the U.S. non-farm payrolls report on Friday.

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