EURO GOVT-Spanish yields climb on talk of more debt sales

Thu May 9, 2013 12:04pm EDT

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* Yields rise on syndication talk after solid bond sale

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* Greece sets hopes on end-2014 return to debt market

By Marius Zaharia and Emelia Sithole-Matarise

LONDON, May 9 (Reuters) - Spanish yields rose on Thursday on speculation the country was planning to offer more bonds via a syndicated deal soon, after its borrowing costs dropped sharply at an auction earlier in the day.

Spain sold slightly more than planned at a triple-bond sale where demand was slightly weaker, but analysts and traders said it still looked healthy and was no reason to sell the paper.

Spanish authorities were not immediately available for comment. But some in the market said Spain may look to take advantage of increased appetite for higher-yielding debt with a syndicated offer, further encouraged by Portugal's solid 10-year debt sale on Tuesday.

"The auction went OK, but there are rumours of a syndicated deal next week," one trader said. "So there is a lot of supply in a short period of time and we also believe Spanish yields have fallen far too far, far too fast."

The country's 10-year bond yields were 9 basis points higher on the day at 4.20 percent, compared with around 4.10 percent before the auction, dragging equivalent Italian yields in their wake.

They have fallen from about 7.8 percent in mid-2012, before European Central Bank President Mario Draghi said he would do whatever it took to save the euro, to 2-1/2 year lows of 3.95 percent last week.

Expectations that the European Central Bank will ease policy further after it cut its key rate last week to 0.50 percent are anchoring German 10-year yields near record lows and pushing investors towards higher-yielding assets to maximise returns.

Some analysts say the trend of narrowing yield spreads between German bonds and the rest of the euro zone's debt is likely to resume, as no major central bank is expected to shift away from an ultra-easy policy stance any time soon.

"The downside for peripherals is limited because the ECB continues to act as a backstop. In the current desire for yield pickup investors are also hopeful that Japanese fund managers will start to increase their exposure to Europe in coming months," said RIA Capital Markets strategist Nick Stamenkovic.

Bund futures, a safe-haven asset that throughout the financial crisis has usually weakened when appetite for riskier assets picked up, settled 4 ticks up at 145.89.

"Bunds are cheap given the rate outlook," a second trader said.

BUSY MONTH FOR PERIPHERAL DEBT

Speculation of a Spanish syndication deal was also fuelled by the success other lower-rated euro zone sovereigns have had this month in borrowing on markets.

Portugal found strong foreign demand for its first 10-year bond sale since its bailout in 2011 on Tuesday, while Slovenia managed to borrow $3.5 billion to stave off a bailout last week, just two days after Moody's downgraded it to junk status.

Greece, bailed out with some 200 billion euros in loans since May 2010 and having restructured its debt last year, hopes to come back to the market around the end of 2014, its finance minister said.

"It is a scenario, but it's not my base scenario," said Gabriel Sterne, an economist at distressed debt brokerage Exotix. "It depends whether the decline in yields ... translates into growth for the real economy."

Greek 10-year yields were last 4 basis points lower on the day at 9.70 percent, having hit a post-restructuring low of 9.44 percent earlier in the session. In June 2012, at the height of market fears that the country might leave the euro zone, its yields topped 30 percent.

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