EURO GOVT-Bunds in demand as ECB, Spain supply looms

Wed Jan 9, 2013 1:08pm EST

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* Healthy demand at German auction supports Bunds
    * Higher yields, fragile euro zone outlook support demand
    * Spanish yields rise before Thursday's debt sale


    By Emelia Sithole-Matarise and Ana Nicolaci da Costa
    LONDON, Jan 9 (Reuters) - German Bunds pushed higher on
Wednesday with the sale of new five-year bonds drawing sturdy
demand as some investors saw value in the euro zone's
lowest-risk debt after a recent sell-off.
    Investors were lured back into German debt this week by
higher yields following the last-minute U.S. deal to avert a
fiscal crisis, and with the euro zone economic outlook still
fragile. 
    The rebound in prices from one-month lows could extend into
the next session if Spain's first debt sale this year, the start
of a heavy funding programme for the country at the forefront of
the euro zone debt crisis, disappoints, some strategists said.
    "The gains in the Bund market are mirroring some of the
fading euphoria in risk assets which were triggered by the
compromise on the U.S. fiscal talks in the first days of the
year.
    "The real test of importance for market sentiment is going
to be tomorrow and Friday with the auctions of Spanish and
Italian bonds ... We could see disappointment with respect to
the Spanish auction and that could support Bunds." 
    German Bund futures rose 15 ticks on the day to
settle at 143.58, recouping earlier losses after a well-received
sale of 4.0 billion euros of five-year bonds.
    The auction drew bids for 1.8 times the amount on offer,
compared with 1.9 times at a previous auction of similar debt in
November.  
    Although the bid-cover was lower than the 1.96 average at
similar sales in 2012, analysts said the pricing was strong and
the tail - the difference between the lowest and the average bid
 - was low, indicating good demand. 
 
    Expectations that the European Central Bank will keep
interest rates at record lows at its policy meeting on Thursday
also helped to prop up demand at the sale. 
    Shorter-dated German debt is highly sensitive to shifts in
ECB monetary policy and investors will be looking to signals
from policymakers on Thursday on when next the bank will cut
borrowing costs. 
    In the secondary market, five-year yields were
3 basis points lower at 0.455 percent and 10-year Bund yields
 were down 1.4 bps at 1.48 percent.
    "We seem to be holding the 1.50 level, which is obviously a
key support level - (around) the upper end of the recent trading
range," RIA Capital Markets strategist Nick Stamenkovic said.
    
    SPAIN IN FOCUS
    Demand at bond sales from the Netherlands and Austria in the
previous session showed investors remain keen to hold safer euro
zone assets even as the pick-up offered by Italian and Spanish
bonds, combined with the promise of central bank intervention,
has lured them back into those markets.
    Spanish 10-year bond yields were 5 basis
points higher at 5.13 percent, with bond prices coming under
pressure one day before the country's first debt auction of
2013. Traders normally push for lower prices to make way for new
supply.
    The Spanish Treasury plans to raise a total of up to 5
billion euros ($6.5 billion) from a new bond, maturing March 31,
2015, and by reopening bonds due Jan. 31, 2018 and July 30,
2026.
    While the auctions are largely expected to meet healthy
demand, some strategists said a failure to hit the upper end of
the target could prove disappointing for those investors who
reckon the country might struggle to meet this year's heavy
funding needs without triggering European Central Bank support.
    Madrid unveiled a sizeable 121 billion euro gross funding
target for the year on Tuesday - a 7.6 percent increase on the
amount it raised in 2012 that highlights the country's economic
plight. 
    Spain's ability to raise funds in the market will be key in
determining whether it will be forced to seek financial aid this
year - a precondition for purchases of its bonds by the ECB.
    In other euro zone debt, Portuguese government bond yields
rose across the curve with the country's government facing legal
challenges on the austerity measures in the 2013 budget.
 
    Portuguese 10-year yields were last 9 bps up at 6.45 percent
, having risen as high as 6.81 percent earlier.
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