* Bunds sink half a point to session low after weak auction
* Uncertainty over near-term outlook weighs on Bund auction
* Spanish yields fall as Madrid launches 5-year dollar bond
By William James
LONDON, Feb 20 German debt futures fell and a
sale of 10-year bonds struggled on Wednesday as investors kept
to the sidelines before events likely to determine demand for
low-risk assets in coming weeks.
The 4.04 billion euro bond sale drew less demand than
expected, falling short of previous auctions and narrowly
avoiding becoming the first German auction in five months to see
bids fall short of the total amount issued.
Bund futures fell to a session low of 142.24, down
58 ticks on the day, extending early losses after the auction
result was announced.
Market participants attributed the weak demand to a
reluctance to take big positions before Italian elections this
weekend, and the need for clearer signals from economic data
before judging progress across the currency bloc.
"This is a weak result with the auction only just being
covered on a real basis," said Rabobank rate strategist Lyn
Graham-Taylor, although he highlighted the bond sale came at a
competitive price compared to secondary market levels.
"This (weakness) may be explained by the general risk-on
tone of recent times and also that many investors are looking to
sit on the fence heading into the Italian elections."
Tuesday's upbeat investor sentiment data from Germany was
also cited as a factor behind the sluggish demand, and further
encouragement from purchasing managers' index number on Thursday
and a German survey on Friday could extend the fall in Bund
Nevertheless, worries that the Feb. 24-25 Italian election
will produce a fragmented coalition government with limited
scope to reform were likely to keep Bunds within the 142 to 143
range that has held over the last two weeks, analysts said.
Despite Italy's looming election, the country's 10-year bond
yields were 2 basis points lower on the day at
4.39 percent, continuing a pattern of buyers emerging to take
advantage of price dips.
DZ Bank said shorter-dated Italian bonds looked attractive
as overall market sentiment improved and in anticipation of a
fresh rally if former Prime Minister Silvio Berlusconi's
election campaign fails to win him influence.
Elsewhere among the region's struggling peripheral states,
Spanish 10-year bond yields were 5 bps lower at
5.16 percent before 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 also opened order books on a new
five-year bond denominated in U.S. dollars.
The dollar bond issue is 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 markets
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