* Spanish, Italian bonds hit by profit-taking
* Markets undecided whether ECB intervention will work
* Uncertainty to remain high at least until September
By Marius Zaharia
LONDON, Aug 7 Spanish and Italian short-term
government bond yields rose on Tuesday, as caution took over
after a recent strong rally fuelled by prospects of the European
Central Bank resuming buying of the two countries' debt.
The ECB said last week it may resume purchasing bonds if
troubled countries activated the euro zone's rescue funds and
accepted strict conditions and supervision. This provided some
relief for peripheral markets in the past few days.
But investors did not seem fully convinced ECB intervention
would succeed in insulating Spain and Italy from any escalation
of the debt crisis and worries remained over the conditions that
had to be met before the ECB could step in.
The ESM bailout fund, which the ECB wants countries to tap
before it buys their bonds, is not yet functional as the German
Constitutional Court is due to rule on it on Sept 12. Some
analysts also wondered how strong ECB interventions would be as
past attempts to cap borrowing costs in Greece, Ireland and
Portugal have failed.
Two-year Spanish yields rose 40 basis points on
the day to 3.73 percent, having fallen sharply from highs of
over 7 percent seen two weeks ago, just before ECB President
Mario Draghi pledged to do whatever was needed to save the euro.
Italian two-year yields rose 38 bps to 3.47
percent, with traders saying thin volumes exaggerated the move.
"We are seeing some profit taking. We had a huge drop in
yields and I think Spain asking for help is not imminent," one
Ten-year Spanish yields were 6 bps higher on
the day at 6.86 percent, with the psychological 7 percent level
that sparks fear an imminent loss of market access still within
reach. Equivalent Italian yields were 5 bps up at
"More or less we are in a waiting mode. I don't expect big
moves before the September (Constitutional Court) meeting," said
Norbert Wuthe, senior government bonds strategist at Bayerische
As long as uncertainty remained high, room for Spanish and
Italian bonds to rally further was limited, Wuthe said.
German Bund futures have also shown signs of
hesitation in pricing in better times for the euro zone. On
Thursday and Friday, they saw intra-day swings of more than 200
ticks, before stabilising somewhat this week.
On Tuesday, the September contract traded 10 ticks lower at
143.10. At 1.40 percent, 10-year Bund yields were
0.4 bps higher on the day, but bang in the middle of the 1.2-1.6
percent range seen over the European summer.
"Guesswork as to how forthcoming ECB/EU intervention might
look continues," Commerzbank rate strategist Benjamin Schroeder
said in a note, adding that last week's low of 142.64 could act
as a lower bound for a new range in coming days.
Helaba Landesbank Hessen-Thueringen strategists said Bund
futures may fall towards 142.22, the 61.8 percent retracement of
the rise in July, but expected them to bounce afterwards,
favouring a trading range of 142.22 to 144.08.