EURO GOVT-Spanish auction doubts fuel peripheral bond selloff

Thu Nov 8, 2012 8:16am EST

Related Topics

* Signs of weak demand at Spanish auction spook investors

* Gloomy global growth outlook adds to pressure on periphery

* ECB keeps rates unchanged; focus on Draghi news conference

By Emelia Sithole-Matarise and William James

LONDON, Nov 8 (Reuters) - Spanish and Italian debt yields rose on Thursday after signs of weak demand at an auction of new five-year Spanish bonds raised a warning flag for some investors.

The sale, hours before the European Central Bank kept interest rates steady at a record low 0.75 percent, completed Spain's planned funding for 2012 and won the government time to hold out longer before asking for international aid.

Such a request would allow the ECB to buy Spanish bonds but bank President Mario Draghi was not expected to say much about any potential purchases of Spanish debt in his news conference beginning at 1330 GMT.

The 4.7 billion euro debt sale included its first auction of longer-term bonds in 18 months but the wide range of bids accepted for the five-year debt drew criticism.

"The five-year sale was awful. I don't think it was good at all," a trader said, highlighting the 9 basis points difference between the highest accepted yield and the average yield - a measure of demand known as the auction "tail".

Spanish 10-year yields rose to 5.86 percent, up 14 bps to their highest since mid-October, with yields across the curve rising by a similar amount and fellow struggler Italy's debt also pressured.

Madrid's borrowing costs sit well below their July peak, when investors appeared to be abandoning the country because of its dire fiscal position.

But the market's goodwill is predicated on Spain asking for a bailout and activating ECB bond-buying, and politicians in Madrid show little sign of making such a move soon.

"Rajoy said recently he was fine with the current (borrowing) levels and the Tesoro can sustain these levels for a longer period of time," said DZ Bank strategist Christian Lenk.

"But, given the recent widening of spreads and the 10-year yields of the bonos (Spanish bonds) creeping back to the 6 percent level you see that the ECB effect is fading away."

Italian 10-year yields were up 9 bps at 5.00 percent as a risk-filled global backdrop also added to pressure on the euro zone's lower rated issuers.

FISCAL CLIFF

President Barack Obama is facing a political showdown with a divided Congress over the so-called "fiscal cliff" of about $600 billion in expiring tax cuts and spending reductions due to take effect in January.

Some analysts warn the cuts could hit the U.S. economy hard, adding to European Commission warnings about anaemic growth in the euro zone and renewing demand for low-risk government bonds.

"The global environment has turned favourable for core bond markets and the EU forecasts for next year are rather gloomy. That's why we saw some (peripheral euro zone bond) risk-off moves," Patrick Jacq, a strategist at BNP Paribas, said.

The Bund future was last four ticks lower at 142.71 after the ECB's widely-expected rate decision but still close to two-month highs underpinned by the U.S. and euro zone growth concerns.

Comments by Draghi on Wednesday on the weak growth outlook, as well as the European Commission forecasts, have raised speculation the ECB may signal more willingness to ease in the next few months.

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