February 6, 2014 / 8:46 AM / 3 years ago

Spanish yields dip before large debt auction, ECB meeting

4 Min Read

LONDON, Feb 6 (Reuters) - Spanish bond yields edged down on Thursday before a larger than usual debt auction which is tipped to go well, with demand boosted by expectations of further policy easing from the European Central Bank.

Spain aims to sell up to 5.5 billion euros in three- and five-year bonds on Thursday, which is some 1.5 billion more than it usually aims for at debt auctions. Market participants said they saw little or no problem in raising such a sizeable amount.

Expectations that the ECB may ease policy further, possibly even at its meeting later on Thursday, are likely to keep top-rated bond yields anchored at ultra-low levels and encourage investors to seek higher returns in lower-ranked assets.

The relatively short-dated debt Spain is offering is more sensitive to central bank policy shifts than the 2024, 2027 and 2032 bonds France is aiming to also sell on Thursday in an up-to 8 billion euro auction.

Spanish 10-year yields were 1 basis point lower at 3.72 percent, some nine basis points above the eight-year lows of 3.63 percent hit at the start of the week, but still about 50 basis points lower than at the end of 2013.

Spanish three- and five-year yields were also slightly above similar historical lows.

"Sentiment remains very positive for the periphery ... so the large amount and low yields are unlikely to be an obstacle," said Mathias van der Jeugt, a rate strategist at KBC in Brussels.

A surprise fall in euro zone inflation to 0.7 percent in January has increased pressure on the ECB to ease policy further to defend its price growth target of close to but under 2 percent.

A Reuters poll showed the vast majority of money market traders expected the ECB to keep rates on hold. But some in the market expect more easing.

Barclays strategists expect the ECB to cut its refinancing rate to 0.15 percent from 0.25 percent and the deposit rate to minus 0.10 percent from zero - a move which would effectively penalise banks for depositing cash at the ECB and not lending them to other banks, businesses or consumers.

Some market participants also expect the ECB to stop draining the amount equal to its crisis-era bond purchases every week from money markets as it usually does. This would release almost 180 billion euros in the interbank market, pushing short-term rates lowed.

The forward overnight euro zone bank-to-bank borrowing rates market, one of the best barometers for the perceived ECB outlook, suggests expectations the ECB is likely to hold fire on Thursday but may ease policy later this year.

The Eonia rate dated for the February meeting stood at 0.16 percent, in line with recent spot fixings, but the March Eonia was below 0.13 percent and May to November rates between 0.08 and 0.10 percent.

Ten-year German Bund yields, the benchmark for euro zone borrowing costs, were last 1 basis point higher at 1.55 percent, having hit their lowest since July 2013 at 1.507 percent in the previous session.

"I don't think the market is particularly long (on Bunds) so there's room for some sizeable gains there if they cut. The market is long of periphery but any signs of easing from the ECB should support them as well," one trader said.

"Also there's room for disappointment if he (ECB President Mario Draghi) is not as aggressive as the market thinks he should be but ... (any sell-off) should be short-lived because I think he is just putting off the inevitable."

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