* Spanish yields turn flat after debt sale
* Spanish auction gets high level of bids but poor pricing
* Bunds reverse early losses, impact of U.S. QE uncertain
By Marius Zaharia and William James
LONDON, Dec 13 Spanish bond yields rose after a
debt sale fell short of market expectations on Thursday,
underscoring the challenges the country will face raising funds
Madrid sold a modest 2 billion euros of three- and five-
year paper and a longer-dated bond due in 2040, attracting a
high level of bids, but the wide range of accepted offers hinted
at weaker-than-expected demand.
"At face value it shows that it's becoming trickier for
Spain to refinance their debt, but it's not straight forward to
draw any conclusions from this auction given that its just a
week or so before Christmas and liquidity is thin," said Michael
Leister, senior rate strategist at Commerzbank in London.
"The first auction of next year is going to be really
important as a signal."
Spanish 10-year yields were last flat on the
day at 5.40 percent, but 5 basis points higher than levels seen
just before the results were announced.
Yields on Spanish debt have fallen sharply in the second
half of this year on expectations that Madrid will eventually
seek financial help from its euro zone partners - a move which
would enable the European Central Bank to buy its bonds.
Spain has so far appeared reluctant to ask for a bailout,
but many believe a hefty rise in its funding needs next year may
soon force it to make the move.
Madrid has already expressed worries that an increase in
political tensions in Italy could hurt Spanish debt.
At an Italian debt auction on Thursday, three-year borrowing
costs dropped to their lowest since late 2010, despite increased
volatility in the secondary market following Prime Minister
Mario Monti's unexpected announcement at the weekend of his plan
to step down early.
Monti's decision, which brings forward an expected election
by a few weeks to February, c aused a spike in Italian yields on
Monday, but since then 10-year yields have come
almost all the way back. They were last 3 bps lower on the day
at 4.62 percent.
"They've done okay (at the auction) but you would be foolish
or complacent to think everything is hunky-dory because the
Italian election will be more in focus in 2013," said Alan
McQuaid, chief economist at Merrion Stockbrokers in Dublin.
"As for Spain, they have a lot of debt to pay back in the
next year or so and that's potentially problematic. Ultimately
they would have to move and get a (bailout) deal."
UNDERSTANDING FED'S MOVE
German Bund futures rose in choppy trading as investors
struggled to assess the long-term impact of the U.S. Federal
Reserve's decision to buy more Treasuries.
German bonds fell at the open before recovering to leave
futures 23 ticks higher on the day at 145.49.
The Fed said on Wednesday that it would buy $45 billion in
Treasuries each month alongside an existing pledge to
purchase$40 billion of mortgage-backed securities and would
expand its purchases to include five-year notes.
It also took the unprecedented step of saying it would keep
interest rates near zero until the jobless rate falls to 6.5
percent, well below its current level, so long as inflation is
"It's quite thin volumes out there. It's hard to read
because you can say more quantitative easing is a good thing for
the U.S. economy and maybe we should be risk-on," said Rabobank
strategist Lyn Graham-Taylor.
"But you can read it the other way too, that the economy is
still struggling and it's a risk-off trade. I don't think the
market has made up its mind particularly yet."
McQuaid at Merrion Stockbrokers also said there was a
feeling that the Fed's move, although meant to stimulate the
economy, actually highlighted how weak it is, causing prices to
"People were quick to think it was good for riskier assets
and not good for the core bonds," McQuaid said.
"But from the way they (the Fed) phrased the statement last
night you could see there was genuine concern that unemployment
is not going to fall any time soon."