October 2, 2012 / 11:01 AM / 7 years ago

EURO GOVT-Spanish yields ease on signs of bailout willingness

* Uncertainty over timing stems Bund sell-off
    * Austria sells 1.3 bln euros of bonds

    By Kirsten Donovan
    LONDON, Oct 2 (Reuters) - Spanish government bond yields
eased on Tuesday on signs the country may be ready to ask for a
bailout, but uncertainty over the timing of any request limited
the move and stemmed a sell-off in safe-haven German Bunds. 
    European officials told Reuters on Monday that Spain was
ready to request a bailout as early as next weekend but that
Germany had signalled it should hold off. 
    Yields on two-year Spanish bonds were 16 basis
points lower at 3.25 percent, with their 10-year equivalent down
12 basis points at 5.77 percent. 
    Spain must request aid before the European Central Bank can
step in and buy the country's bonds, something investors are
keen to see happen, but the lack of clarity over the timing has
kept market players on the sidelines.
    "Both Spain and Germany need market pressure to
request/agree a bailout, and it's hard to do either of those
things as long as Spain appears to be able to continue to fund
itself," Rabobank rate strategist Richard McGuire said.
    "So if Spain is ready and willing to make that request, at
least half the obstacles have been removed ... but we're not out
of the woods yet."   
    There has been speculation that Spain may delay its request
until after regional elections on Oct. 21. Another possibility
is that a request is made before an EU summit on Oct. 18-19. 
    "The impression that Spain is looking more ready to ask for
a bailout (is) helping particularly the short-end rally, but
it's pretty much happening across the curve," a trader said.
    "The closer you get to mid-October, the more people would
feel that Spain is getting close to asking for help," he added.
    International investors have been steadily reducing their
exposure to Spanish bonds this year, leaving domestic investors
holding almost 70 percent of the paper. 
    "There's some domestic flows, nothing spectacular though,
and some international players putting some chips down," said a
second trader, stressing that the latter was mostly so-called
fast money such as hedge funds. "The same issues are still
pending, but the market is more stable now." 
    Dealers may try and cheapen the paper before the sale of up
to 4 billion euros ($5.2 billion) of bonds with maturities of up
to five years on Thursday, but the prospect of Spain making a
bailout request should help the auction, McGuire said.
    Markets also awaited the outcome of a credit rating review
by Moody's, in which Spain could lose its investment grade
rating, which would likely trigger a new round of selling of its
    "A Moody's downgrade for Spain could tip the balance for
lower 10-year Bund yields towards 1.3 percent," Commerzbank
strategists said in a note. "However, we see the odds slightly
in favour of a rating confirmation and thus expect to see some
relief in the periphery."
    December Bund futures reversed early gains and were
down 18 ticks on the day at 141.22. Ten-year cash yields
 were 1.5 bps higher at 1.48 percent, having
retreated from the 1.7 percent hit earlier this month. 
    That level represents the top of the recent trading range
and an important technical level to be overcome if Bund yields
are to rise significantly. 
    "Positioning is pretty square, and it doesn't seem like
there's any real conviction in what the next big trade is ...
but there's a recession coming ... so we expect the front end,
especially five-years, to be quite well supported," another
trader said.  
    Austria kicked off the week's new issuance, selling 1.3
billion euros of 2019 and 2044 bonds to complete 85 percent of
this year's funding target.
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