EURO GOVT-Bunds flat as caution sets in before Spain sale, ECB

LONDON Thu Feb 7, 2013 2:12am EST

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LONDON Feb 7 (Reuters) - Bund futures were steady on Thursday and investors stuck to the sidelines ahead of a challenging Spanish bond sale and a potentially testing European Central Bank meeting.

Political uncertainty after Prime Minister Mariano Rajoy faced calls to resign over a corruption scandal this week will likely dampen investor appetite at the Spanish auction, as the country's economic picture remains bleak.

German Bund futures were 1 tick lower at 142.53.

"It needs a bit of a concession this morning, and I am not convinced it trades well afterwards," one trader said, referring to Spanish paper.

Hours later, the ECB is widely expected to keep interest rates unchanged at 0.75 percent but its President Mario Draghi faces a grilling over the bank's sensitivity to the euro's sharp rise and his connection to an Italian banking scandal which has also unsettled Italian debt markets.

In particular, investors will be watching Draghi's assessment of the initial repayments of long-term loans which are seen as a sign of a healing banking sector but have also led to a spike in bank-to-banking lending costs which many view as de facto monetary tightening.

"Maybe the danger is we go into the meeting and people are hopeful that he takes a more dovish slant than he did in January and maybe there is some room for disappointment - I suppose that's the danger going in," the trader added.

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