* Spain in recession but contraction less than forecast
* Thursday's Spanish bond sale seen tougher after S&P cut
* German Bund futures could retest record highs
By Emelia Sithole-Matarise
LONDON, April 30 Spanish government bond yields
slipped on Monday after data showed the country's economy
contracted less sharply than forecast but they were expected to
pick up before debt sales later this week, the first since last
week's ratings downgrade.
Spanish 10-year yields were last at 5.89 percent
, 2.1 basis points lower on the day. Spain's gross
domestic product shrank 0.3 percent in January to March on a
quarterly basis, beating economists' forecasts for a 0.4 percent
The figures will do little to change investors' view that
the euro zone's fourth largest economy will struggle to meet
budget targets as it falls back into a recession exacerbated by
an ailing banking sector, traders and strategists said.
"In our view it doesn't make a huge difference...The
economic performance will be a function of whether credit will
be able to flow again in the economy so the banking issues
remain at the core," UBS strategist Gianluca Ziglio said.
"We need to see which practical ways the government is going
to tackle this issue. We're going to have the auctions on
Thursday and that's going to be another element of volatility
for Spanish bonds," he said.
A sustained break above 6 percent on 10-year Spanish yields
could see borrowing costs accelerate to the panic-inducing
levels over 7 percent that forced Greece, Portugal and Ireland
to seek bailouts.
Some strategists and traders said the yields could breach 6
percent if Spain struggles to sell three- and five-year bonds on
Thursday - its first sale since Standard & Poor's surprised
markets with a two-notch downgrade of its ratings last week.
Although Italian bond yields have been caught in the Spanish
updraft, Spain looked set to underperform Italy - which has no
scheduled debt sales this week - before Thursday's auctions.
"We have a strong case for Spain to continue to underperform
Italy with Spain under pressure on ratings jitters, upcoming
supply, while Italian supply is out of the way," Commerzbank
strategist Rainer Guntermann said.
The 10-year Spanish/Italian 10-year yield spread
was last at 26 basis points, a touch
wider compared with late Friday levels.
ECB, U.S. PAYROLLS LOOM
The fragility in peripheral euro zone debt and nerves over
Sunday's French presidential runoff propped up German
Investors are also waiting to see if the European Central
Bank gives any hints of future support for the market at its
policy meeting on Thursday.
U.S. non-farm payrolls numbers follow on Friday after weaker
than forecast Q1 GDP data bolstered those hoping for further
stimulus from the Federal Reserve.
The June Bund future was last seven ticks up at
140.77. It reached a contract high of 141.38 on Friday as
Spanish yields briefly topped 6 percent after the S&P downgrade.
UBS technical analyst Richard Adcock said a "break above
141.37/38 will be the next bullish signal, opening the door to
141.56, then even the 200 percent extension level at 144.04".
German 10-year yields were last slightly lower at 1.70
percent with some strategists saying they could
retest the record low of 1.549 percent hit last Monday with
month-end related buying keeping yields subdued.
"We're still buying dips in Bunds. The ECB could tone down
their language a bit this week and people are looking at
payrolls on Friday. If it comes in soft Treasuries and Bunds are
likely to go up again," a trader said.