* Signs of weak demand at Spanish bond auction spook
* Gloomy global growth outlook adds to pressure on periphery
* ECB expected to keep rates unchanged, no steer on Spain
By Emelia Sithole-Matarise and William James
LONDON, Nov 8 Spanish and Italian debt yields
rose on Thursday after signs of weak demand at an auction of new
five-year Spanish bonds raised a warning flag for some
Although Spain completed its 2012 funding needs with the 4.7
billion euro debt sale, including its first auction of
longer-term bonds in 18 months, the wide range of bids accepted
for the five-year debt drew criticism.
"The five-year sale was awful. I don't think it was good at
all," a trader said, highlighting the 9 basis points difference
between the highest accepted yield and the average yield - a
measure of demand known as the auction 'tail'.
Spanish 10-year bond yields rose to 5.86
percent, up 14 basis points to their highest since mid-October,
with yields across the curve rising by a similar amount and
fellow struggler Italy's debt also pressured.
Madrid's borrowing costs sit well below their July peak,
when investors looked to be abandoning the country because of
its dire fiscal position.
But the market's goodwill is predicated on the country
asking for a bailout and activating the bond-buying support of
the European Central Bank, and politicians in Madrid show little
sign of making such a move soon.
"Rajoy said recently he was fine with the current
(borrowing) levels and the Tesoro can sustain these levels for a
longer period of time," said DZ Bank strategist Christian Lenk.
"But, given the recent widening of spreads and the 10-year
yields of the bonos creeping back to the 6 percent level you see
that the ECB effect is fading away."
A risk-filled global backdrop also added to pressure on the
euro zone's lower rated issuers.
President Barack Obama is facing a political showdown with a
divided Congress over the so-called "fiscal cliff" of about $600
billion in expiring tax cuts and spending reductions due to take
effect in January.
Some analysts warn the cutbacks could hit the U.S. economy
hard, adding to European Commission warnings about anaemic
growth in the euro zone and refreshing demand for low risk
"The global environment has turned favourable for core bond
markets and the EU forecasts for next year are rather gloomy,
that's why we saw some (peripheral euro zone bond) risk-off
moves," Patrick Jacq, a strategist at BNP Paribas, said.
The Bund future was last 7 ticks higher at 142.82,
its highest level since Sept. 6, and was likely to remain around
there before the ECB's rate decision due at 1245 GMT.
The central bank is expected to leave interest rates on
hold at a record low 0.75 percent.
But comments by President Mario Draghi on Wednesday on the
weak growth outlook, as well as the European Commission
forecasts, have raised speculation the ECB may signal more
willingness to ease in the next few months.
Traders and strategists expect little steer from Draghi at
his post-meeting press conference on Thursday on the ECB's new
bond purchase scheme before a decision by the Spanish government
to request euro zone aid.