* Bunds dip ahead of Spanish auction
* Sale seen going well but relief short lived
* France to sell 11 bln euros of bonds
By Kirsten Donovan
LONDON, April 19 German government bonds edged
lower on Thursday but benchmark 10-year yields held within a
whisker of all-time lows ahead of Spanish debt auctions that
will test investor confidence and set the near-term tone for
peripheral debt markets.
Spanish 10-year bond yields were little changed around 5.84
percent ahead of the sale of up to 2.5 billion euros of 2014 and
Yields on its debt have fallen in the secondary market in
the previous two sessions as dealers covered short positions
ahead of the auction after a decent T-bill sale on Tuesday.
"A positive outcome is already in the price but even if you
do get a better-than-expected result that would merely represent
a stay of execution rather than a commuting of the actual
sentence," said Rabobank rate strategist Richard McGuire.
"Positive auctions are just stepping stones to the next
negative result ... which is likely to happen sooner rather than
Concerns over Spain revolve around whether the country can
carry out further austerity without choking the economy and the
extent to which leveraged domestic banks have become vulnerable
to another blow-out in peripheral debt markets.
Thursday's sale will be helped by the small target size, 15
billion euros of coupon and redemption payments due at the end
of April and a shortage of the two bonds in the secured lending,
or repo, market.
"Spain have really done everything they can do to make sure
this auction goes well," said a trader. "The recent tightening
is all about positioning but focus will return to fundamentals
With markets positioned for a successful outcome, any
disappointment could see Spanish 10-year yields head back
towards 6 percent and Bunds test their recent highs. Italian
bonds would also be likely to come under pressure ahead of
auctions next week.
But even a positive result is unlikely to take the pressure
off the sovereign for long.
"The main point to watch for is whether there is much demand
post auction: solid price action may well encourage further
(closing of short positions), but we expect investors to overall
be wary of initiating new longs," said Credit Agricole rate
strategist Peter Chatwell.
"Any spread-tightening post auction could well be short
With the relatively small target size, traders have
speculated that Spain may sell more debt than indicated and
Commerzbank strategists added that anything below 2.5 billion
euros would be seen as a disappointment.
They also said the split between the two-year bond, which
can be supported by funds from the European Central Bank's
three-year funding operation, and the 10-year bond would be
"The still very steep shape of the 2-10 year (Spanish yield
curve) could tempt the Tesoro to skew supply towards the
short-end, while the market will look for how much can be placed
comfortably in the 10-year area," said Commerzbank strategist
France will also sell up to 8 billion euros of long-term
debt, including new two-year bonds and up to 3 billion euros of
inflation-linked paper, with the auctions expected to go
German Bund futures were 21 ticks lower at 140.15,
with 10-year yields up almost 3 basis points at 1.66 percent but
still within sight of this week's record lows of 1.622 percent.
"A positive Spanish auction could underpin a risk-on move
and a tightening of peripheral spreads but that does not
challenge the longer-term view ... the path of least resistance
is for lower core yields and a bull flattening of core yield
curves," Rabobank's McGuire said, referring to a curve
flattening led by a fall in longer-dated yields.