* Strong Spanish auction spurs confidence, bond yields fall
* Cyprus remains crucial to near-term outlook, Bunds edge up
* Array of possible outcomes force investors to wait and see
By William James and Marius Zaharia
LONDON, March 21 Spanish government bond yields
fell on Thursday, pushed lower by a strong Spanish debt sale, as
investors kept faith with the euro zone's large peripheral
states despite Cyprus's struggle to avoid financial meltdown.
Demand for debt issued by large, vulnerable euro zone states
such as Spain and Italy remains buoyed by the belief that the
European Central Bank will step in with bond-buying support if
they came under pressure and the bonds look attractive because
of the high yields they offer.
Spanish 10-year yields fell 11 basis points on
the day to 4.89 percent, almost unchanged from levels seen
before Cyprus shocked markets at the weekend by unveiling a plan
to tax savers' bank deposits to fund a bailout.
The drop in Spanish yields accelerated after an auction in
which Madrid sold 4.5 billion euros worth of bonds, more than
the 4 billion euro maximum target. Borrowing costs fell and
analysts said demand was strong.
"Clearly there is no Cyprus angst or Italy angst in that
sale. They sold more than they were targeting," said Marc
Ostwald, strategist at Monument Securities in London.
Nevertheless, Cyprus remains an acute source of concern for
the market as Nicosia searches for a new way to secure an
international bailout after Cypriot politicians overwhelmingly
rejected the deposit levy plan earlier this week.
The European Central Bank has given Cyprus until Monday to
fashion a plan or face lose the funding lifeline keeping its
banks afloat. A senior EU official made clear to Reuters that
the bloc was ready to see the bankrupt island banished from the
euro in the belief it could then contain damage to the wider
"I'm amazed there's not been a bigger sell-off," said
Rabobank strategist Lyn Graham-Taylor. "I suspect we'll be
continually watching headlines over the next couple of days and
the weekend... it's difficult to analyse the impact until they
reach some kind of decision."
Traders highlighted a Reuters report showing euro zone
finance officials acknowledged being "in a mess" over Cyprus
during a conference call on Wednesday, discussed imposing
capital controls and talked openly about the country leaving the
"The market has been trying to shrug it off, with Cyprus
being a small country, but the prospect of one country leaving
the euro zone is enough to give a bid to Bunds," one trader
Strong demand for German bonds, sought as a safe haven in
times of market stress, helped Bund futures rise despite
historically high prices. Cash yields were expected to stay
close to 2013 lows in the near term.
Bund futures were last 14 ticks higher on the day
at 144.44, while 10-year cash yields fell 1.1 basis points to
1.367 percent, having hit a 2013 low of 1.343 percent on
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.
A second trader said the market seemed to want 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," he 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."