May 31, 2013 / 4:26 PM / 6 years ago

EURO DEBT SUPPLY-Spain borrowing costs seen up in edgy market

LONDON, May 31 (Reuters) - Spanish borrowing costs will likely rise at bond sales next week as concern over when the U.S. Federal Reserve might scale back its economic stimulus brakes a rally in riskier assets.

Spain is expected to mirror the trend seen this week at Italy’s debt auctions at which Rome paid the highest costs to borrow over 10 years, though demand remained intact with investors enticed by higher yields.

Analysts say the recent reversal in vulnerable euro zone issuers’ borrowing costs reflected the trend in global debt markets after Federal Reserve Chairman Ben Bernanke hinted last week the central bank might cut down on its bond purchases in coming months.

Markets are expected to remain choppy before key non-farm payrolls data next Friday which should shed light on the outlook for U.S. stimulus which has buoyed riskier assets this year.

This might keep foreign investors sidelined from the Spanish auction of an estimated 4 billion euros of two-, three- and 10-year bonds a day before the payrolls report but strategists expect domestic buyers to pick up any slack from overseas.

“For the near term, with volatility having picked up quite significantly ,it’s likely to be rather a domestic affair,” said Michael Leister, a strategist Commerzbank.

“This very positive trend that we’ve seen over the last months, with foreigners and foreign holdings in peripheral debt increasing again, will probably take a breather but in the medium term we think it will continue.”

PAYING MORE

Spanish 10-year borrowing costs in the secondary market were up 9 basis points on the day at 4.44 percent as traders pushed for cheaper prices ahead of the auction next Thursday. They have jumped about 50 bps over the month from 2010 lows of 3.95 percent hit in early May.

Shorter-dated yields have also risen but they are all still well below record peaks hit at the height of the euro zone debt crisis last July before European Central Bank President Mario Draghi vowed to do whatever it took to save the euro.

The ECB’s yet-to-be-tested bond-buying backstop and expectations it will ease monetary policy further to prop up a frail euro zone economy even if the Fed were to start scaling back on its stimulus are seen keeping underlying demand intact for peripheral bonds.

“It (Spanish auction) will go well but they will need to pay higher costs,” said Alessandro Giansanti, a strategist at ING in Amsterdam. “That is the trend we are going to face over the coming weeks but I think that it will be just a short-term correction on the trend in tighter spread.”

The backup in yields in core debt markets will also likely entice investors to pick up German and French bonds being sold on Wednesday and Thursday respectively, analysts said. Germany will auction up to 4 billion euros of five-year bonds while France will offer between 7 and 8 billion euros of medium- to long-term paper.

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