September 25, 2012 / 11:36 AM / 5 years ago

EURO GOVT-ECB bond scheme doubts lift Bunds, Spanish yields

* Report on Bundesbank adds to concern over Spain bailout

* Spanish short-term borrowing costs edge up at auction

* Moody’s Spain ratings review adds to market jitters

By Emelia Sithole-Matarise

LONDON, Sept 25 (Reuters) - German Bund prices rose on Tuesday after a news report said Germany’s Bundesbank had asked lawyers to check the legality of the European Central Bank’s new bond purchase scheme.

In a report that hit Spanish debt, driving yields higher, German tabloid Bild, which did not name its sources, said ECB and Bundesbank in-house lawyers were checking what proportions the programme would have to take on and how long it would have to last for it to breach EU treaties.

Spanish borrowing costs edged up at an auction of short-term debt as the report added to investor nervousness over when the ECB scheme, aimed at containing the bloc’s three-year-old crisis, would begin.

Investors were already jittery over Spain’s apparent reluctance to seek a bailout -- a condition for the ECB bond purchases -- and the uncertainty was likely to underpin safe-haven German Bunds in coming days.

“The Bundesbank challenge to the Draghi plan might be giving us a bit of a bid...Anything that could possibly delay the ECB’s plans isn’t good,” a trader said.

The Bund future was last up 39 ticks at 140.79 with German 10-year yields flat on the day at 1.53 percent .

Worries the euro zone’s strongest economy was no longer immune to the debt crisis, after Monday’s fall in the German Ifo business sentiment index to its lowest since early 2010, also supported Bunds.

The main focus remained on Spain, which is due to present a budget later this week. It could include stricter reforms and thus avoid the stigma of outsiders telling the government how to fix the economy as a condition of the rescue package.

MUDDLING THROUGH

Spanish two-year yields rose as much as 12 basis points to 3.23 percent before retreating but were still less than half their euro-era peaks reached in July before ECB President Mario Draghi vowed to do whatever it took to save the euro.

Ten-year yields were up 8 bps at 5.78 percent. Italian counterparts were also higher after a sale of 5.44 billion euros of two-year zero coupon paper and inflation-linked bonds.

Analysts and traders said investors were wary of pushing prices too far either way given uncertainty over when Madrid would request aid. EU officials said Prime Minister Mariano Rajoy was not expected to do so before a regional election in his native Galicia on Oct. 21.

The lower Spanish debt yields had also eased some of the pressure on Madrid to seek assistance but market impatience and the Moody’s review could prompt a move, strategists said.

“For now our view is that the pressure is not really high enough on Spain,” said Michael Leister, a senior rate strategist at Commerzbank.

“This muddling through by politicians can continue because what we can see is the market seems to respect this ‘Draghi put’ so everybody is reluctant to go short Spain and Italy because you don’t want to be caught by a quick activation of the ECB (bond purchases).”

The Draghi put refers to the increased market confidence resulting from the ECB’s back-stopping the bond market.

The threat of a downgrade of its sovereign debt rating to junk status, with Moody’s Investors Service expected to complete a review soon, also hung over the market, prompting some participants to adopt a neutral stance on Spanish debt.

“We are neutral on Spain but on any rewidening (of spreads) we would favour Spain over Italy because Spain would probably benefit first from ECB assistance especially at the short end so there could be some outpeformance of Spain in coming weeks,” BNP Paribas strategist Patrick Jacq said.

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