* Bunds tick lower as concession builds into auction
* Italy election, relative value to ensure smooth sale
* Spanish yields steady ahead of wave of bond supply
By William James
LONDON, Feb 20 Bund futures dipped on Wednesday
ahead of a 10-year bond sale but the rise in yields, as well as
caution in the run up to Italian elections, was likely to ensure
Bunds have settled into a well-defined range since
overcoming a sell-off at the start of this year when investors
poured cash into high-yielding markets like Italy and Spain.
Traders say European investors are not prepared to go out on
a limb in either direction in the days remaining to the Italian
polls on Feb. 24-25. But a positive overnight performance for
share markets put safe-haven Bunds on the back foot.
"All in all it makes sense to see the Bund in a tight range
at the moment, perhaps with some concession ahead of the auction
weighing today," said BNP Paribas rate strategist Patrick Jacq.
German Bund futures fell 25 ticks to 142.57, but
remained well within the 143 to 142 range that has limited price
moves for the last two weeks and dealers said the auction should
draw healthy demand. Results are due at 1030 GMT.
"I think the auction will go relatively well. Outright the
Bund can be considered expensive but relative to Treasuries,
peripherals and in asset swap terms it's not that expensive,"
Despite worries that Italy may end up with a fragmented
parliament and less focus on reform, its bond yields were
slightly lower on the day, continuing a pattern
of confident buyers emerging to take advantage of price dips.
Ten-year Italian yields were 2 basis points
lower at 3.39 percent.
DZ Bank said shorter-dated Italian bonds looked attractive
at the moment as overall market sentiment improved and in
anticipation of a fresh rally if former Prime Minister Silvio
Berlusconi's election campaign ends in defeat.
Elsewhere among the region's struggling peripheral states,
Spanish 10-year bond yields were 2 bps lower at
5.19 percent ahead of a wave of supply expected to hit the
market in coming days.
On Thursday Spain will sell up to 4 billion euros of
conventional bonds and the sovereign has also appointed banks to
lead a sale of dollar-denominated debt.
Traders said Spanish yields could rise ahead of Thursday's
auctions as dealers look to sell existing holdings to make room
for the new issues and nudge prices lower to ensure they get a
better deal at the sale.
The dollar bond issue would be the first by Spain since
September 2009 and will enable Madrid to diversify its investor
base and tap into the largest community of yield-hungry emerging
Commerzbank estimated that market conditions would make the
dollar deal only marginally cheaper than issuing in euros, but
would be taken as another positive step towards meeting its 2013
"Besides the small funding arbitrage, the deal would also
come along with some relief on the conventional (Spanish
government bond) supply front for this year, as Spain has to
sell another record-high amount," the bank said in a note.
Spain has so far raised 22.7 billion euros of a 121 billion