* Italian, Spanish politics under the microscope
* German five-year debt sale draws strong demand
* Thursday's Spanish debt sale seen key for periphery
* Markets, especially in periphery, seen choppy
By Emelia Sithole-Matarise and Marius Zaharia
LONDON, Feb 6 Bunds rose on Wednesday, with a
five-year German debt auction pointing to strong demand for
assets perceived as safe havens after a flare-up of concern over
political stability in Spain and Italy.
The firmer tone in Bunds looked set to extend into Thursday
with investors edgy over how well a Spanish auction of up to 4.5
billion euros of bonds will go in a market rattled by a
corruption scandal that has cast doubt on Prime Minister Mariano
The German sale was also helped by this year's rise in
yields due to expectations that excess liquidity in the banking
system will shrink faster than initially thought as banks repay
large sums in emergency loans to the European Central Bank.
Investors snapped up 3.27 billion euros of the paper at an
average yield of 0.68 percent, 15 basis points higher than when
it was first launched in February.
"Today's good demand at the five-year auction is a sign that
the recent political instability in the (euro zone) periphery
played a major role in re-direction of some flows into
safe-haven paper," said Annalisa Piazza, market economist at
Bund futures climbed 34 ticks to settle at 142.54
with German 10-year bonds yielding 1.63 percent, 3 basis points
down on the day, while five-year bond yields were 2.5 bps lower
at 0.68 percent.
The Bund future this week bounced off three-month lows as a
rally in peripheral euro zone bonds fizzled out with investors
focusing uneasily on Madrid and Rome.
In Spain, Rajoy is facing pressure to resign over the
corruption scandal in which he denies any wrongdoing, while in
Italy former premier Silvio Berlusconi is gaining ground in
pre-election polls, raising worries the recent progress in
structural reforms there could be reversed.
Against that backdrop, some analysts expect Spain's sale of
2015, 2018 and 2029 bonds on Thursday to struggle to meet the
kind of stellar demand it has drawn at auctions so far this
"This (Spanish auction) has the potential to influence
market direction," said David Keeble, global head of fixed
income strategy at Credit Agricole in New York.
"It's going to be tougher than we've been used to given the
volatility that seems to have come back in both directions (for
Spanish 10-year yields rose 6 basis points to
5.44 percent, well within sight of a six-week peak of 5.51
percent hit early this week while equivalent Italian yields
were up 7 bps at 4.55 percent.
Robin Marshall, fixed income director at Smith and
Williamson securities, said he was wary of buying Italian and
Spanish bonds at current levels, given nagging questions about
reforms and the political outlook.
"We need to see a back-up to 6-6.5 percent in yield levels
and if we see any problems with systemic institutions, debt
trap, lack of reforms or popular ... (unrest), the moves can be
quite dramatic," said Marshall, who helps manage about $18
"Those levels would be interesting (for us to go back in
Spain and Italy) but it depends on what happens. You need to see
the context, if the same people are going to be in the
government and how the economy is doing," he said.
Besides the Spanish auction, market focus will be on the ECB
meeting on Thursday and debt traders said they would watch for
any sign President Mario Draghi may soften his tone on monetary
policy given recent strength in the euro currency.
Marshall said the lack of prospects of further easing in
ECB policy at a time when other major central banks are printing
large amounts of money also made German debt attractive from a
currency perspective for overseas investors.