EURO GOVT-Spanish yields turn lower as downgrade impact fleeting
* Spanish bonds recover early post-downgrade losses * Losses tempered by unwillingness to go short while ECB waits * Italy bond auction finds solid demand but yields higher By Ana Nicolaci da Costa LONDON, Oct 11 (Reuters) - Yields on Spanish government bonds turned lower in late trading on Thursday as investors bought back into a cheapened market after a sell-off in early trading that was due to an overnight downgrade by rating agency Standard & Poor's. Analysts also said that given the prospect of potentially unlimited European Central Bank bond buying, if Spain asks for aid, it was difficult for investors to have selling positions on the Spanish sovereign debt market. Instead, any rise in yield was being seen as an opportunity to buy back in. Standard and Poor's cut Spain's rating to BBB-minus with a negative outlook, just one notch above junk grade and in line with peer Moody's, which is expected to conclude its own review of the country's rating soon. "You have got this circularity to it - the more the yield goes up, the more likely it is you get more buying coming from the ECB. It's very difficult to really punish that market," David Keeble, global head of fixed income strategy at Credit Agricole said. Central bank bond buying is dependent on Spain asking for aid, which it has been reluctant to do, but the promise of intervention has been enough to keep Spanish yields within a tight range in recent weeks. Ten-year Spanish yields fell 4.4 basis points to 5.78 percent, having earlier risen as high as 5.96 percent. Two-year bond yields meanwhile were down 5.3 bps to 3.27 percent, off the session high of 3.58 percent. "There has been a massive buyer from the U.S. who seems to have caught the market out. There was some ... selling this morning after the S&P downgrade but now a lot of people have been caught short and squeezed. We saw buying at the front end," a trader said. COUNTING ON THE BACKSTOP The S&P move raises the likelihood that Spain could be rated below investment grade by two agencies in the near future, which would cause it to drop out of some major bond indices and force selling by investors who track such benchmarks. The fleeting market impact of the downgrade underscores the psychological impact of the ECB's intervention promise which also underpinned demand at a sale of Italian bonds earlier, analysts said. Italy sold 6 billion euros of bonds at auction, paying a higher price to sell three-year debt than a month ago but still finding solid demand. "Yields were a bit higher but not particularly elevated so all in all it went pretty smoothly," said Nick Stamenkovic, strategist at RIA Capital Markets in Edinburgh. "I think it's the expectation that the ECB continues to provide a backstop for not just Spain, but Italy as well, further down the road." In the secondary market, ten-year and two-year Italian bond yields were also lower at 5.03 percent and 2.48 percent respectively. German Bund futures were down 8 ticks on the day at a settlement close of 141.15, coming under slight pressure in tandem with their U.S. counterparts. U.S. government debt prices fell on Thursday as traders sought to lower prices before a $13 billion auction of 30-year supply and encouraging data on jobless claims reduced safe-haven demand for bonds.
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