EURO GOVT-Spanish sale halts periphery rally, boosts Bunds

Wed Dec 5, 2012 12:50pm EST

Related Topics

* Spanish auction falls short of maximum issuance target
    * Auction spooks market, Spain sells off while Bunds rally
    * German sale solid, demand for high-quality bonds intact


    By Emelia Sithole-Matarise and William James
    LONDON, Dec 5 (Reuters) - Spain's bond yields jumped on
Wednesday after demand at its latest bond sale undershot
expectations, prompting a shift to more liquid assets that
pushed German and French debt higher.
    A strong auction had been anticipated, but the 4.25 billion
euros raised fell short of the 4.5 billion euro maximum target,
and analysts also pointed to the wide range of accepted bids as
a sign of weaker overall demand.
    The sale triggered a swift selloff in Spanish debt, driving
10-year bond yields 16 basis points higher to 5.43
percent while equivalent French yields fell below 2 percent for
the first time in the euro era and German Bunds rallied.
    Spanish bonds were seen staying under selling pressure with
more supply due next week and investors fretting about how it
will manage to meet a heavy issuance schedule early next year if
it does not trigger European Central Bank bond purchases.
 
    Madrid has so far refrained from making the aid request
needed to activate the ECB scheme and the bank is expected to
give little steer on the issue at its policy meeting on
Thursday.
    "The main difficulty for Spain is the wall of supply in
January. I find it very difficult to see how Spain can surmount
that without requesting support," Societe Generale strategist
Ciaran O'Hagan said.     
     "It would be wise for them to ask for support now before we
hit that supply hump. It's best to be preventive and do it right
now rather than wait." 
    The auction brought recent gains in peripheral bonds to a
halt although the reversal took back only a small portion of a
rally that pushed yields to their lowest since March on Monday.
    Spain's 10-year bond yield premium over Germany rose to 407
basis points, up 20 bps on the day but still below highs of over
650 bps hit in July. 
    The spread has tightened sharply since the ECB promised in
September to support heavily indebted euro zone countries,
including Spain, with bond purchases if they applied for help.
Some market participants say it could widen further in the
absence of such a request.
    "The whole ECB buying promise remains untested as long as
Spain is refusing to request aid beyond the bank support, so the
(spread tightening) effect of it may fade over time," Investec
rate strategist Elisabeth Afseth said. 

    CORE SUPPORT
    In contrast to Spain, a sale of two-year German bonds was
sufficiently well bid to keep auction yields below zero as
investors paid up for the security and liquidity of assets
issued by the euro zone's strongest sovereign.
    "The auction was good. It's the last auction for this year
so they ended the programme pretty well," said Artis Frankovics,
strategist at Nomura in London.
    "Fundamentals haven't changed for the Schatz. There's still
demand for high quality collateral."
    The weak Spanish sale just before the Schatz auction helped
demand but the underlying desire to hold German paper remains
strong, supported by longer-term worries about the euro zone and
more immediate concerns about U.S budget talks. 
    German Bund futures settled 54 ticks up on the day
at 143.28 with cash 10-year yields 4 bps lower at
1.35 percent.  
    Politicians in the United States are trying to agree a
compromise to avoid tax rises and spending cuts that could snuff
out a nascent economic recovery.
    "If they don't resolve this 'fiscal cliff', we've got this
dread of their economy going back into recession which will have
a real detrimental effect for the world," said Alan McQuaid,
chief economist at Merrion Stockbrokers.
    The focus will now shift to Friday's U.S. non-farm payrolls
report which is used as a key indicator of the economy's health.
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