* German Schatz yield hits highest in nearly three months
* ECB seen backing away from near-term interest rate cut
* Spanish bond auction sparks core debt selloff
* Spanish 10-year yield dips to 10-month low below 5 percent
By William James and Marius Zaharia
LONDON, Jan 10 Yields on German bonds rose on
Thursday after the European Central Bank left interest rates on
hold and signalled pressure for a cut from some of the bank's
policymakers had eased.
ECB President Mario Draghi, speaking at the bank's monthly
news conference, said the decision to leave interest rates at
0.75 percent was unanimous.
This contrasted with last month's signal that the ECB was
divided on whether to cut, and caused investors to quickly price
out lingering expectations of a near-term fall in the central
bank's main interest rate.
"The ECB's evident reticence to either cut interest rates
or, more importantly, signal any possibility of future interest
rate reduction has added to the pressure on core curves," said
Rabobank strategist Richard McGuire.
German two-year bond yields, which are
particularly sensitive to interest rate expectations due to
their short duration, rose 4 basis points on the day to 0.107
percent, their highest since late October.
Short-term money market rates also moved quickly to reflect
the changing outlook with Euribor futures selling off
and Eonia overnight rates rising to reflect higher interbank
Bund futures extended an earlier fall to hit a low
of 142.54 before recovering some ground to settle at 142.70,
down 88 ticks on the day.
Demand for longer-term, low-risk German debt had started
falling earlier in the day after struggling euro zone sovereign
Spain beat its own estimates at its first bond auction of the
year by issuing more debt than it had initially targeted.
That calmed the markets' worst fears over how Madrid will
meet it tough 2013 fundraising target and helped push the
country's 10-year bond yield below the closely-watched 5 percent
level for the first time in 10 months.
"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."
Spanish 10-year yields were last 22 bps lower
on the day at 4.92 percent, on track for their second biggest
daily fall in nearly three months. Equivalent Italian yields
also rallied, driving yields 11 bps lower to 4.17
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.