EURO GOVT-Healthy Spanish sale weighs on Bunds before ECB

Thu Feb 7, 2013 6:25am EST

Related Topics

* 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.