* Spain sells more than planned at bond auction
* ECB keeps interest rates unchanged at record lows
* Investors expect monetary easing signals from the ECB
By Marius Zaharia
LONDON, April 4 Spanish bonds rallied on
Thursday after a strong debt auction in Madrid, while German
Bunds were steady with investors reluctant to place fresh bets
before a news conference by ECB President Mario Draghi.
The European Central Bank kept its refinancing rate
unchanged at a 0.75 percent record low as expected, but the
focus was on any hints about future moves that Draghi might
offer in his post-meeting comments after 1230 GMT.
Spain sold more bonds than planned as investors bid heavily
for the paper. Analysts said the backstop
provided by the ECB's as-yet untested bond-buying programme had
offset any worries about a potential fallout from the Cypriot
Spain was seen especially at risk from contagion from Cyprus
due to its fragile banking system. Nicosia's bailout is the
first to impose losses on bank depositors and many analysts had
feared the move could trigger bank runs across the euro zone.
With no sign that was happening, however, investors jumped
on the relatively high yields on offer in Spain.
Ten-year Spanish yields fell 8 basis points on
the day to 4.85 percent, some 357 basis points over equivalent
German yields - the euro zone's benchmark.
"The underlying situation has stabilised a bit with the
Cyprus crisis getting better," said Gianluca Ziglio, executive
director of fixed income research at Sunrise Brokers.
"There is still room for rallying in Spanish bonds, probably
they could target 330-340 bps in terms of spreads."
Those levels represented the lower end of this year's
roughly 60 bps range for Spanish/German 10-year yield spreads.
ING rate strategist Alessandro Giansanti saw 320 bps as the
lower limit, saying improvements in Spanish budget and growth
data were needed for the spread to shrink beyond that level.
Worries about Italy, which is still in search of a
government after an election in February produced political
deadlock, may also cap gains for Spanish bonds, analysts said.
Analysts said markets were expecting Draghi to open the door
for future monetary policy easing moves. The focus will be on
his expectations for how the economy will fare later this year.
"If he still signals that in the second half he expects a
small recovery, Bunds will sell off," said Emile Cardon, market
economist at Rabobank in Utrecht.
He added, though, that such a reaction may be limited and
short-lived given that Bunds are seen as a safe haven and that
investors are still worried about the potential ramifications of
Cypriot's tough bailout and the uncertainty in Italy.
The euro zone economic decline continued in March, PMI
surveys showed on Thursday, with analysts saying the data was
supporting the case for further monetary easing.
Bund futures were last 15 ticks higher on the day
at 145.67, while cash 10-year German yields were 1
bps lower at 1.27 percent. Cardon said he saw a near-term range
of 1.20-1.40 percent for Bund yields, but added they were more
likely to fall from current levels than rise.