EURO GOVT-Healthy Spanish sale weighs on Bunds, ECB eyed

Thu Feb 7, 2013 8:10am 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 the nation's borrowing costs off the
day's highs and weighed on safe-haven Bunds on Thursday, as the
European Central Bank left interest rates unchanged.
    The ECB held its key rate at a record low of 0.75 percent as
expected, but investors will focus on President Mario Draghi's
news conference later in the day. He is expected to face a
grilling over the bank's sensitivity to a sharp strengthening in
the euro currency. 
    Draghi can also expect to be asked how much he knew about
the derivatives scandal at Siena's Monte Paschi bank,
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
but demand was considered strong. The Treasury raised funds
above the top of its target range even though 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 142.14
after the auction results, down 40 ticks on the day.
    Spanish yields fell after the auction and
reversed direction. They were last down 2.1 basis points at 5.42
percent.
    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 Draghi's news conference,
scheduled at 1330 GMT.
    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," one trader
said.
    Draghi's assessment of banks' initial repayments of the
three-year LTRO crisis loans 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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