Pre-auction trading lifts Italian, Spanish yields

Mon Jul 29, 2013 11:42am EDT

Related Topics

* Italian, Spanish bonds weaken before auction

* Investors reluctant to place big bets before key events

* Bunds seen in 142-143 range before c.bank meetings

By Marius Zaharia and Ana Nicolaci da Costa

LONDON, July 29 (Reuters) - Italian and Spanish government bond yields rose on Monday as investors made room in their books for new paper to be auctioned later in the week.

The Italian Treasury will offer up to 6.75 billion euro ($9 billion) of bonds maturing in 2018 and 2024 on Tuesday, while Madrid will sell 2-3 billion euros of 2016 and 2018 bonds on Thursday.

Italian 10-year bond yields rose 6 basis points on the day to 4.46 percent, while equivalent Spanish yields were up by a similar amount at 4.65 percent.

"This is a concession the market is building ahead of the auctions," one trader said.

The amount of debt on sale in each of the two countries is 1-2 billion euros below this year's average, so the pre-auction selling pressure was smaller as well. However, thin trading volumes exacerbated the rise in yields, traders said.

The auctions are expected to go smoothly thanks to large debt redemptions this week, while Italian and Spanish bonds have also continued to benefit from domestic investor support and from the European Central Bank's bond-buying promise.

Some 10 billion euros of Italian bills are due to be repaid on Wednesday, while 25 billion euros of bonds mature on Thursday. Italy and Spain pay a combined 16.6 billion euros worth of coupons this week, according to Reuters data.

"Cash-flows back to investors should support both the Italian and Spanish auctions," Commerzbank rate strategist Michael Leister said.

Against that backdrop, Italy's short-term borrowing costs fell to their lowest since May at an auction on Monday.

German Bund futures were 1 tick lower on the day at 142.47, with investors reluctant to place big bets before a series of monetary policy decisions and key data such as U.S. non-farm payrolls this week.

The European Central Bank, the Bank of England and the Federal Reserve are expected to offer reassurances that their monetary policies will remain loose.

Commerzbank's Leister said the market was "fairly neutral" going into the central bank meetings and that Bund futures would probably trade in a 142-143 range until then.

"At least for the ECB, there is not too much expectation, but they showed us last time around that they are good for a surprise," he said. "For the Fed, (it is) really difficult to say, there seems to be the consensus that they will start tapering in September which we think might be a bit too early."

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