September 30, 2010 / 8:59 AM / 9 years ago

EURO GOVT-Bonds fall after overdone rally on Ireland, Spain

* Bunds “overdone” rally peters out

* Price tag of up to 34 bln euros on Anglo Irish bailout

* Spain downgraded by Moody’s; ECB tender and U.S. data eyed

By George Matlock

LONDON, Sept 30 (Reuters) - German government debt prices fell on Thursday, as traders said an initial rally was overdone after the Irish central bank priced the bailout of Anglo Irish Bank and Moody’s removed Spain’s top-notch triple-A rating.

A combination of weaker Bunds and real buying of peripheral debt issues helped intra-euro zone yield spreads to tighten.

“The Bund rally was overdone at the opening as the Irish and Spanish news overnight was no worse than expected and now Bunds are coming off. There is also decent buying by end investors of Irish, Portuguese and Spanish bonds,” Eamon Reilly, a trader at Davy Stockbrokers in Dublin said.

The December Bund future FGBLc1 was down five ticks on the day at 131.76 by 0830 GMT, after earlier hitting its highest level since Sept. 8 at 132.20.

The Irish central bank priced the bailout of Anglo Irish at up to 34 billion euros — just inside market expectations of up to 35 billion euros.

The country’s central bank also said another lender, Allied Irish Banks ALBK.I, would need to raise an additional 3 billion euros by the end of the year.

Irish Finance Minister Brian Lenihan said Allied Irish Banks would become majority owned by the state, and added bond auctions scheduled for October and November would be cancelled and the issuer would not return to the bond market until 2011. [ID:nDUB003257] [ID:nWLA4154]

“The headline of a (public) deficit of 30 percent is somewhat scary. But...there is no funding need from the recapitalisation, so Ireland doesn’t have to come to the market and won’t for the rest of the year,” Christoph Rieger, a strategist at Commerzbank in Frankfurt said.

The 10-year Irish/German bond yield spread tightened by 9 basis points on the day to 457 bps and the Spanish/German spread tightened by 13 bps to 185 bps. IE10YT=TWEBES10YT=TWEB

In outright terms, Irish yields slightly outperformed Bunds, falling by 10 bps to 6.79 percent, while the Bund yield was down 0.6 bps at 2.236 percent.

Spanish yields outperformed Bunds more decisively, down 7.4 bps at 4.14 percent. Portuguese yields also outperformed Bunds, 6.8 bps down at 6.50 percent.

Spain’s loss of its triple-A status had been highly anticipated in the markets, as Moody’s had a deadline of Sept. 30 to decide whether to follow suit with other credit ratings agencies Standard & Poor’s and Fitch, in removing the euro zone’s fourth-largest economy’s top rating.

But Moody’s said the outlook for Spain was stable, indicating no further downgrades were likely.

“We expected the (Spain) downgrade to be delivered today and one notch with a stable outlook is obviously the best downgrade one could get,” Rieger said.

EYES ON ECB TENDER, U.S. DATA

Markets are awaiting the results at around 0920 GMT of the six-day liquidity tender following a smaller-than-expected take up of three-month funds by European banks on Wednesday.

ECB Vice-President Vitor Constancio said the lower take up indicated money markets were normalising, but dealers said a large bid by banks in the six-day tender could unwind that optimism and send Spanish and other peripheral debt yield spreads wider. [ID:nLDE68T0EH]

The interest rate-sensitive two-year Schatz yield DE2YT=TWEB was down 0.6 basis points at 0.785 percent.

“Ireland and Spain are now behind us, we need to be thinking about what’s next. And that means the realisation that euro zone liquidity is being withdrawn, as Constancio implies, which could push Bunds lower later in the session,” Marc Ostwald, bond strategist at Monument Securities in London said.

Market attention will later turn to U.S. weekly jobless claims data for more evidence of a slowing economy.

A Reuters poll of economists forecast 460,000 claims ECON.

“It’s end of quarter, hence far from obvious which way the market will react to what is forecast to be a slightly lower claims figure,” Ostwald said.

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