February 6, 2014 / 1:20 PM / in 4 years

German Bund yields rise as ECB holds fire on rates

* Bund yields rise after ECB leaves interest rates unchanged

* Spain beats target at debt sale, yields fall

* Demand supported by expectations of further ECB easing

* Spain completes a fifth of 2014 funding target

By Marius Zaharia

LONDON, Feb 6 (Reuters) - Benchmark German Bund yields rose on Thursday after the European Central Bank left interest rates unchanged, disappointing some in the market who had expected a cut.

The ECB held its main refinancing rate at a record low 0.25 percent, left the deposit rate it pays on bank deposits at zero and held its marginal lending facility - or emergency borrowing rate - at 0.75 percent.

Some in the market, including Barclays and RBS, had expected a cut in the refi rate after a surprise fall in euro zone inflation to 0.7 percent in January increased pressure on the ECB to defend its price growth target of close to but under 2 percent.

German 10-year Bund yields rose 3 basis points to 1.57 percent, up from 1.56 percent before the decision. Bund futures hit a session low of 143.68, having traded just above 143.90 earlier.

ECB President Mario Draghi is due to hold a news conference at 1330 GMT and some market participants expect him to flag further monetary policy easing later this year.

Such expectations were evident in the forward overnight euro zone bank-to-bank borrowing rates market, one of the best barometers for what markets perceive the ECB outlook to be.

The Eonia rate dated for the March meeting was 0.1329 percent, slightly below the spot rate. May to November Eonia rates were between 0.09 and 0.11 percent.

“A rate cut cannot be ruled out in the future but another step at today’s meeting could have been interpreted as a panic reaction to the fall in inflation,” Annalisa Piazza, market economist at Newedge, said in a note.

“We expect today’s press conference to remain very dovish ... leaving the door open for further action if needed.”

Some market participants expect Draghi to say the ECB will stop draining the amount equal to its crisis-era bond purchases every week from money markets as it usually does. This would release almost 180 billion euros into the interbank market, pushing short-term rates lower.


Expectations for further ECB easing kept low-rated euro zone well bid.

Spanish bond yields fell more than most of their peers after a larger than usual debt auction went smoothly. Ten-year yields fell 4 bps to 3.69 percent, slightly above the eight-year lows of 3.63 percent hit this week, but still about 50 bps lower than at the end of 2013. Spanish three- and five-year yields were also slightly above similar lows.

Extending a trend of solid debt sales this year, Madrid issued a greater than planned 5.6 billion euros in three- and five-year bonds to complete more than a fifth of its 2014 funding target.

“Expectations for more ECB action have definitely been an important driving force for tighter intra-euro (yield) spreads,” said Jussi Hiljanen, chief fixed income strategist at SEB in Stockholm.

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