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EURO GOVT-Lacklustre Spanish bond sale prompts selloff
December 5, 2012 / 11:41 AM / 5 years ago

EURO GOVT-Lacklustre Spanish bond sale prompts selloff

* Spanish auction falls short of maximum issuance target
    * Auction spooks market, Spain sells off while Bunds rally
    * German sale solid, demand for high-quality bonds intact

    By William James
    LONDON, Dec 5 (Reuters) - Spanish bond yields rose sharply
on Wednesday after demand at its latest bond sale disappointed
expectations, causing a shift towards less risky assets that
helped push German Bund futures higher.
    A strong auction had been anticipated, but the 4.25 billion
euros raised fell short of the 4.5 billion euro maximum target,
with analysts pointing to the wide range of accepted bids as a
sign of weaker overall demand.
    The sale triggered a swift selloff in Spanish debt, driving
10-year bond yields 12 basis points higher to 5.39
percent while German debt futures rallied to a session
high of 143.05, 31 ticks up on the day.  
    "This has generally been perceived as a negative result by
the market," said Rabobank strategist Lyn Graham-Taylor.
    The auction brought recent gains in peripheral bonds to a
halt, although the reversal took back only a small portion of a
rally that pushed yields to their lowest since March on Monday.
    "It's a bit disappointing that they didn't manage to raise
the full amount... that caused a bit of a correction in the
market," said Nick Stamenkovic, strategist at RIA Capital
Markets in Edinburgh. 
    "But the yields are still down from the previous auction and
demand is still pretty decent out there."
    The market's earlier 'risk-on' mood this week was fuelled by
the announcement of better-than-expected terms on a Greek bond
buyback, increasing the chances of a successful debt reduction
and the payment of badly-needed aid to Athens.
    That deal was expected to be concluded on Friday and,
providing it was successful, the improved appetite for
higher-yielding assets could resume into year end, analysts
said.      

    CORE SUPPORT
    In contrast to events in Madrid, a sale of two-year German
bonds was sufficiently well bid to keep auction yields below
zero as investors paid up for the security and liquidity of
assets issued by the euro zone's strongest sovereign.
    "The auction was good. It's the last auction for this year
so they ended the programme pretty well," said Artis Frankovics,
strategist at Nomura in London.
    "Fundamentals haven't changed for the Schatz. There's still
demand for high quality collateral."
    The weak Spanish sale just before the Schatz auction helped
demand but the underlying desire to hold German paper remain
strong, supported by longer-term worries about the euro zone and
more immediate concerns about the progress of U.S budget talks. 
    Policymakers across party lines in the United States are
trying to hammer out a deal to avoid a series of tax rises and
spending cuts which would hamper a nascent economic recovery.
    "If they don't resolve this 'fiscal cliff', we've got this
dread of their economy going back into recession which will have
a real detrimental effect for the world," said Alan McQuaid,
chief economist at Merrion Stockbrokers.
    "If it's resolved I think safe havens will sell off a bit
and then we come back next year... but the market will still be
nervous with elections in Italy and Germany coming up (in
2013)." 
    Focus will now shift to U.S. data, with ADP employment
figures guiding expectations for Friday's headline non-farm
payrolls report which is used as a key indicator of the U.S.
economy's health.

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