* Political uncertainty to dent demand at Spanish sale
* Failure to sell maximum amount would disappoint-analyst
* ECB meeting keeps Bunds range-bound
By Ana Nicolaci da Costa
LONDON, Feb 7 Spanish government bond yields
rose on Thursday as investors braced for an auction, while a
potentially testing European Central Bank meeting kept German
Political uncertainty after Prime Minister Mariano Rajoy
faced calls to resign over a corruption scandal this week may
dampen investor appetite at the sale, as the country's economic
outlook remains bleak.
The ECB is later expected to keep interest rates unchanged
at 0.75 percent but its president, Mario Draghi, faces a
grilling over the bank's sensitivity to the euro's sharp rise
and his connection to an Italian banking scandal which has also
unsettled Italian debt markets.
Ten-year Spanish government bond yields were
3.7 basis points higher at 5.48 percent, while two-year
borrowing costs rose 1.9 bps to 2.89 percent.
Spain's Treasury aims to issue between 3.5 billion euros and
4.5 billion euros when it sells bonds maturing in 2015, 2018 and
Marc Ostwald, strategist at Monument Securities, said a
failure by Spain's Treasury to issue the maximum amount would be
The ECB was more optimistic than expected on the region's
economic prospects at its last meeting, and investors will look
to see whether it keeps that tone or sounds more cautious.
"Maybe the danger is we go into the meeting and people are
hopeful that he takes a more dovish slant than he did in January
and maybe there is some room for disappointment - I suppose
that's the danger going in," one trader said.
In particular, investors will be watching Draghi's
assessment of the initial repayments of long-term loans or
While they are considered a sign of a healing banking
sector, they have also led to a spike in bank-to-banking lending
costs which many view as de facto monetary tightening.
The upcoming events kept investors on the sidelines and
German Bund futures in a tight ranges. Bunds were down
6 ticks on the day at 142.48.
"Key will be the slant the ECB puts - if it does put any at
all - on the recent, very pronounced bout of positivism (after)
the LTRO repayment which has served to push up short-dated
interest rates and significantly strengthen the euro," Richard
McGuire, senior fixed income strategist, at Rabobank said.
Investors will look to see "whether the ECB believes this to
be a justified reaction to a more positive outlook for the
banking sector and the region at large or whether it's perhaps
too much too soon and therefore risks dampening any possible
An endorsement would leave higher-rated paper vulnerable to
selling while any concerns raised would support them, he said.