EURO GOVT-Healthy Spanish sale weighs on Bunds before ECB
* Bunds fall after Spanish debt sale meets solid demand * Spanish yields off day's high after auction * Spain raises more bonds than its maximum target * Investor attention turns to ECB press conference By Ana Nicolaci da Costa LONDON, Feb 7 (Reuters) - Healthy demand at a sale of Spanish debt helped take its borrowing costs off the day's highs and weighed on safe-haven Bunds on Thursday, as investor attention turned to the European Central Bank's monthly meeting. The ECB is 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. Draghi can also expect to be asked how much he knew about the derivatives scandal at Siena's Monte Paschi bank BMPS.MI, which has unsettled Italian bond markets, and what he did about it when he headed Italy's central bank. Analysts had expected demand at Spain's auction to be diluted by political uncertainty after Prime Minister Mariano Rajoy faced calls to resign this week over a corruption scandal but bid-cover ratios were solid for all three maturities sold. . Yields rose on the three bonds - due in 2015, 2018 and 2029 - even though the issuance was skewed towards short-dated paper that comes within the scope of potential ECB bond-buying. "That's quite impressive - they sold more than we were expecting," Alessandro Giansanti, strategist at ING said. "It's positive due to the fact that we have had some volatility in spreads recently, mainly for political risk, and that has affected Spain and Italy." German Bund futures fell to a session low of 142.24 after the auction results, down 30 ticks on the day. Spanish yields were slightly higher but fell after the auction, coming off peaks hit shortly before the sale with the 10-year up 1.5 basis points at 5.46 percent having hit a session high of 5.55 percent earlier. Spain sold 4.6 billion worth of bonds in total, slightly above the top end of its 3.5-4.5 billion euro target range. Borrowing costs rose but the bid-to-cover was above 2 in all three cases.ECB VERDICT Market attention will now turn to the ECB, which announces its interest rate decision at 1245 GMT, with a news conference to follow. The central bank was more optimistic than expected at its last meeting regarding the region's economic prospects, and investors are curious to see whether it keeps that tone or sounds more cautious. "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," one trader said. Draghi's assessment of banks' initial repayments of the three-year crisis loans, or LTROs, they took from the ECB last year will also be scrutinised. While they are considered a sign of a healing banking sector, they have also led to a spike in bank-to-bank lending costs which many view as de facto monetary tightening. "Key will be the slant the ECB puts - if it does put any at all - on the recent, very pronounced bout of positivism (after) the LTRO repayment, which has served to push up short-dated interest rates and significantly strengthen the euro," said Richard McGuire, senior fixed income strategist at Rabobank. Investors will look to see "whether the ECB believes this to be a justified reaction to a more positive outlook for the banking sector and the region at large, or whether it's perhaps too much too soon and therefore risks dampening any possible incipient recovery." An endorsement would leave higher-rated paper vulnerable to selling while any concerns raised would support them, he said.
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