* Investors expect Cyprus to come up with new plan
* Spain sells more than planned at debt auction
* Bunds steady, Italian and Spanish yields fall
By Marius Zaharia
LONDON, March 21 Spanish government bond yields
fell on Thursday after Madrid showed resilience to the Cypriot
crisis at a strongly bid debt auction in which it sold more
bonds than planned.
Demand for debt issued by vulnerable states such as Spain
remains underpinned by the belief that the European Central Bank
would step in with support if they came under pressure.
Bunds weakened slightly, with expectations Cyprus will come
up with a new plan to resolve the impasse over its proposed
bailout making investors reluctant to increase allocations to
But German yields were expected to hold close to 2013 lows
in the near term as uncertainty over the fate of Cyprus remained
high, keeping alive fears of contagion in the euro zone.
The Mediterranean island was in talks with Russia over
potential cooperation in the banking and energy sectors and over
a loan aimed at avoiding a levy on bank deposits proposed by the
European Union as part of a bailout.
Cyprus ordered banks to stay shut until next week to prevent
a bank run. The ECB said it would maintain its emergency
liquidity assistance for Cypriot banks until March 25, which is
now seen as a deadline for a plan to be agreed.
"The market now believes that there will be something
formulated, that a solution will be brought forward," ICAP
strategist Philip Tyson said. "It could be a different matter
next week, though."
Spanish 10-year yields were 11 basis points
lower on the day at 4.89 percent, levels seen before the Cypriot
bailout plan was announced.
The drop in yields accelerated following an auction in which
Spain sold 4.5 billion euros worth of 2015, 2018 and 2023 bonds,
more than the 3-4 billion euro target. Borrowing costs fell and
analysts said demand levels looked strong.
"All lines were well received despite the recent turmoil ...
market dealers probably hope that the Cyprus bailout will be
sorted out soon," said Annalisa Piazza, market economist at
Newedge in London.
Bayerische Landesbank rate strategist Norbert Wuthe said the
Cyprus situation was "a litmus test" of confidence in the ECB's
as yet unused bond-buying programme. The so far "tame market
reaction contrasting the shockwaves from the media" showed the
backstop was working, he said.
"A BIT SCARY"
Bund futures were last 8 ticks lower on the day at
144.22, while 10-year cash yields rose 0.7 basis points to 1.385
percent, having hit a 2013 low of 1.343 percent on Tuesday.
One trader said a range between 144.00 and this week's high
of 144.82 should hold near-term. However, he warned against
underestimating the seriousness of the situation, pointing to
this week's gains in the Bund future of more than a full point.
"It feels the market wants to buy (Bunds after any dip in
prices). Nobody wants to be caught short but they don't want to
be caught too long either," the trader said.
"The market seems to be very nervous. Cyprus is indeed a
small economy ... but when you see it managed to move the market
that much it's a bit scary."