EURO GOVT-Bunds fall as Spanish sale brightens investor mood

Thu Jan 17, 2013 11:42am EST

Related Topics

* German debt prices fall as market welcomes Spanish auction
    * Spain sells 4.5 bln euros, Portugal readies market return
    * Ample central bank liquidity drives greater risk-taking

    By William James and Ana Nicolaci da Costa
    LONDON, Jan 17 (Reuters) - German debt prices tumbled on
Thursday, unwinding a three-day rally, as a successful Spanish
bond sale buoyed confidence towards the euro zone's struggling
states and cooled appetite for safe havens.
    Spain hit the top end of its 4.5 billion euro target range
at a sale of short- and long-term bonds, which took its
fundraising for the year to nearly 9 percent of its target.
 
    That, coupled with a landmark 15-year bond sale by Italy on
Tuesday and signs that Portugal would join fellow bailout
recipient Ireland by returning to bond markets this year, cut
demand for the safety of German debt. 
    "It's all periphery-positive and suggests that there's scope
for the risk premium that Bunds have to unwind further," said
Chris Scicluna, head of research at Daiwa Capital Markets.   
    The German Bund future fell to a session low of
142.56, within half a point of the seven-week lows reached late
last week, and wiping out most of the gains made earlier this
week when the market mood was more cautious.
    However, as has been the case in recent days, buyers still
keen to hold German debt emerged to take advantage of the dip in
prices, leaving the contract to settle at 142.76, down 61 ticks.
    While the Spanish auction went smoothly, yields rose in the
secondary market after the sale suggesting that the supply had
found buyers, but that appetite at current levels was not
limitless given the challenges the country still faces.
    Spanish 10-year yields were up 5 basis points
on the day at 5.11 percent, some 25 basis points from the lows
seen just after its previous debt sale on January 10.
    Spain has benefited from the European Central Bank's promise
to buy the debt of any state that undertakes a bailout
programme, but still faces a battle to generate economic growth
and bring its deficit under control.
    
    AMPLE LIQUIDITY
    France also saw firm demand at a short- and medium-term debt
sale as the country continued to benefit from investors looking
for higher returns that those on safe-haven German debt.
 
    French yields rose in the secondary market after the auction
as the market absorbed the supply, also tracking a broader
sell-off in safer debt. Ten-year yields were were
6 basis points higher at 2.19 percent.
    Appetite has been strong for both the least risky and
lower-rated bonds at auctions this year - a phenomenon ascribed
to ample liquidity as investors allocate funds at the start of
the year, an overhang from major central banks' ultra-loose
monetary policies.
    To play on this trend while not taking on the greater risk
attached to peripheral bonds, Rabobank recommends buying Belgian
debt and selling Dutch, according to Elwin de Groot, a senior
market economist at the bank.
    "It's not a long-term position but it's more the idea that
in the near term there is such a huge amount of liquidity," he
added.
    Ten-year Belgian bonds yielded 2.28 percent,
compared to 1.75 percent on the equivalent Dutch bond
.
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