* Spanish debt auction finds strong demand
* Spanish debt rallies, safe-haven Bunds fall
* ECB seen keeping rates steady at record lows
By Marius Zaharia
LONDON, Jan 10 Spain's benchmark bond yields
fell to 10-month lows on Thursday after Madrid kicked off its
challenging 2013 funding programme in force with a strongly bid
auction of mostly two-year debt.
Safe-haven Bunds fell after the auction, but losses were
limited as investors kept positioning light before a European
Central Bank meeting later in the day when key interest rates
are expected to stay at record lows.
Spain sold 5.82 billion euros worth of new 2015 bonds and
re-opened 2018 and 2026 debt - more than the 4 billion-5 billion
euros targeted as investors bid more than at previous auctions
of similar-dated paper.
Improved appetite for high-yielding assets this year after
the United States averted a fiscal crisis with a last-minute
budget deal was the main reason behind the strong result,
"It was definitely a strong auction, they exceeded the
targeted amount which is a good sign for the first auction of
the year," said Norbert Aul, rate strategist at RBC Capital
"Supply will take its toll and will be heavy going forward,
however we have a positive outlook for Spanish paper."
Two-year debt led the rally in Spain with yields
falling 25 basis points to 2.214 percent, while
Spanish 10-year yields fell below 5 percent for
the first time since March 2012.
While the market responded well to the auction results,
longer-term concerns about Spain's ability to complete the most
challenging funding programme in the euro zone this year
The two-year bond, which was the focus of the sale, falls
within the remit of the OMT, an ECB short-dated bond buying
programme that could be activated if Madrid asks for a bailout
from its euro zone partners.
While that backstop ensures constant demand for two-year
paper, appetite for longer-term debt - more sensitive to foreign
investor demand - is little tested.
"The real test here will clearly be the issuance of a new
10-year bond," Commerzbank rate strategist Michael Leister said.
"Two-year paper is not a robust indicator (of how solid
Spain's market access is), so from a more strategic point of
view you don't get much out of this auction."
Spain has not auctioned a new 10-year bond since November
2011, focusing on shorter-dated paper for which it usually finds
strong domestic demand. That strategy is risky, however, as the
amount of debt to be paid back near term is constantly growing.
The other key event of the day was the ECB rate-setting
meeting. The bank is expected to keep its key refinancing rate
at a record low of 0.75 percent and its deposit facility rate at
zero percent as the euro zone economy has shown some signs of
However, investors will be looking for any clues from
President Mario Draghi on the likelihood of future rate cuts. In
December, he said the ECB had discussed a deposit rate cut,
sending two-year German yields into negative territory.
"Yields have moved higher since the lows in December,
there's been less safe-haven bids and more of a positive tone.
So the market would be surprised if he were bearish," Investec
fixed income strategist Elisabeth Afseth said.
A pessimistic assessment of the euro zone economy from
Draghi may push Bunds higher, but the most likely scenario is a
cautiously upbeat tone from the ECB chief.
"The ECB might be a bit more upbeat, so chances of a rate
cut might recede. You could argue it's a negative (for Bunds)
but I'm not convinced. It's all about future data," the trader
Bund futures were 22 ticks lower at 143.36.
Ten-year German yields were 2 bps higher at 1.50
percent, while two-year yields were flat at 0.059