* Report on Bundesbank adds to concern over Spain bailout
* Spanish short-term borrowing costs edge up at auction
* Moody's Spain ratings review adds to market jitters
By Emelia Sithole-Matarise
LONDON, Sept 25 German Bund prices rose on
Tuesday after a news report said Germany's Bundesbank had asked
lawyers to check the legality of the European Central Bank's new
bond purchase scheme.
In a report that hit Spanish debt, driving yields higher,
German tabloid Bild, which did not name its sources, said ECB
and Bundesbank in-house lawyers were checking what proportions
the programme would have to take on and how long it would have
to last for it to breach EU treaties.
Spanish borrowing costs edged up at an auction of short-term
debt as the report added to investor nervousness over when the
ECB scheme, aimed at containing the bloc's three-year-old
crisis, would begin.
Investors were already jittery over Spain's apparent
reluctance to seek a bailout -- a condition for the ECB bond
purchases -- and the uncertainty was likely to underpin
safe-haven German Bunds in coming days.
"The Bundesbank challenge to the Draghi plan might be giving
us a bit of a bid...Anything that could possibly delay the ECB's
plans isn't good," a trader said.
The Bund future was last up 39 ticks at 140.79 with
German 10-year yields flat on the day at 1.53 percent
Worries the euro zone's strongest economy was no longer
immune to the debt crisis, after Monday's fall in the German Ifo
business sentiment index to its lowest since early 2010, also
The main focus remained on Spain, which is due to present a
budget later this week. It could include stricter reforms and
thus avoid the stigma of outsiders telling the government how to
fix the economy as a condition of the rescue package.
Spanish two-year yields rose as much as 12
basis points to 3.23 percent before retreating but were still
less than half their euro-era peaks reached in July before ECB
President Mario Draghi vowed to do whatever it took to save the
Ten-year yields were up 8 bps at 5.78 percent.
Italian counterparts were also higher after a sale of 5.44
billion euros of two-year zero coupon paper and inflation-linked
Analysts and traders said investors were wary of pushing
prices too far either way given uncertainty over when Madrid
would request aid. EU officials said Prime Minister Mariano
Rajoy was not expected to do so before a regional election in
his native Galicia on Oct. 21.
The lower Spanish debt yields had also eased some of the
pressure on Madrid to seek assistance but market impatience and
the Moody's review could prompt a move, strategists said.
"For now our view is that the pressure is not really high
enough on Spain," said Michael Leister, a senior rate strategist
"This muddling through by politicians can continue because
what we can see is the market seems to respect this 'Draghi put'
so everybody is reluctant to go short Spain and Italy because
you don't want to be caught by a quick activation of the ECB
The Draghi put refers to the increased market confidence
resulting from the ECB's back-stopping the bond market.
The threat of a downgrade of its sovereign debt rating to
junk status, with Moody's Investors Service expected to complete
a review soon, also hung over the market, prompting some
participants to adopt a neutral stance on Spanish debt.
"We are neutral on Spain but on any rewidening (of spreads)
we would favour Spain over Italy because Spain would probably
benefit first from ECB assistance especially at the short end so
there could be some outpeformance of Spain in coming weeks," BNP
Paribas strategist Patrick Jacq said.