* Spanish bond auction finds strong demand
* Spanish debt rallies, safe-haven Bunds fall
* ECB leaves refinancing rate unchanged at 0.75 pct
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 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 the European
Central Bank's monthly news conference. The ECB left interest
rates unchanged at 0.75 percent.
Spain sold 5.82 billion euros worth of new 2015 bonds and
re-opened 2018 and 2026 debt - more than the 4 billion to 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 26 basis points to 2.20 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,
concerns remain 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. In line with expectations, the bank said it would keep
its key refinancing rate at a record low of 0.75 percent and its
deposit facility rate at zero percent.
Investors' attention will shift to the bank's 1330 GMT news
conference for any signals 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 21 ticks lower at 143.37.
Ten-year German yields were 2 bps higher at 1.50
percent, while two-year yields were up half a basis
point at 0.064 percent.