* Spanish yields rise after S&P cuts its sovereign rating
* ECB seen buying Spanish, Italian bonds -traders
* German Bund futures poised for third straight week of
By Ana Nicolaci da Costa
LONDON, Oct 14 Spanish and Italian government
bond yields rose on Friday after Standard and Poor's cut Spain's
credit ratings, prompting the European Central Bank to buy debt
in the secondary market, according to traders.
The one-notch Spanish downgrade came as G20 finance
ministers and central bank chiefs from the world's biggest
economies were due to meet later on Friday in Paris to discuss
the euro zone debt crisis.
Ten-year benchmark Spanish bonds underperformed their
Italian counterparts after S&P cut the long-term sovereign
rating to AA- from AA, citing high unemployment, tightening
credit and high private-sector debt.
But yields came off the day's highs after the ECB was seen
buying Italian and Spanish bonds in the secondary market,
according to traders.
"They have been asking for Italy and Spain all across the
curve, from two-year to 10-year," one said.
Ten-year Spanish yields , rose 2.8 basis points
on the day to 5.24 percent. The Italian equivalent
rose 1.8 bps to 5.84 percent.
The Italian yield earlier matched Thursday's 5.87 percent --
its highest since August, when the ECB first began buying
Italian and Spanish bonds in the secondary market in an effort
to keep yields at sustainable levels.
Another trader said there was more scope for Spanish bonds
to underperform as they were relatively expensive.
"(Spain's) yields are too low against things like Italy,"
the trader said.
Hopes for an eventual recapitalisation of European banks and
leveraging of the euro zone rescue fund have fuelled a sell-off
in safe-haven German bonds in recent weeks but analysts say the
market could turn at any point given the lack of concrete action
German Bund future were down 62 ticks at 133.77,
after a sharp rally in the previous session and as European
stocks traded higher.
They looked headed for a third straight week of losses.
Although, market watchers do not expect much concrete from
the G20 meeting, they hope it will provide an opportunity for
French and German officials to flesh out the bones of a crisis
resolution plan in time for a European Union summit on Oct. 23.
Expectations for that summit are high with investors hoping
for answers to questions regarding the fate of Greece and other
details of the Franco-German plan.
The scope for disappointment was huge, said one analyst.
"It's still very fragile. It can go wrong on (any) of these
different pillars and the risk that (for) one of these pillars,
there is not a clear decision, means that the whole thing can
still unravel again," said Elwin de Groot, senior market
economist at Rabobank.
"Basically that means that we expect (German) yields to fall
back again and possibly for the Bunds to hit the previous peaks
and maybe even go above that before that final solution is ...
forced by the market."
The second trader shared that view arguing that recent
losses have been based on a "hope that wasn't really based on
anything too substantial".
"I think we see 1.70 before we see 2.70 yields" on 10-year
German bonds, the trader said. Ten-year German government bond
yields were up 7.2 basis points at 2.18 percent.