Wednesday, 11 July 2012 15:07
LONDON: German yields were steady on Wednesday before a sale of 10-year German debt which might attract added demand after euro zone finance ministers' latest meeting to address the euro crisis did little to reassure investors.
Italian yields were mixed, with markets largely shrugging off comments by Prime Minister Mario Monti on Tuesday that his country could be interested in tapping the euro zone's rescue fund for bond support. The comments underscored the scale of policymakers' problems in coming to grips with a crisis that is now threatening to engulf the euro zone's third largest economy, long deemed too big to be bailed out. That backdrop is likely to add to the appeal of a German debt sale that offers investors higher returns further up the yield curve after two-year bond yields turned negative following European Central Bank rate cuts last week.
"It should be a good auction, redemptions and coupons should support it," Achilleas Georgolopoulos, strategist at Lloyds Bank. "If the auction goes well we might see a rally across Bunds."
Investors effectively paid France and Germany on Monday to park their money in the relative safety of short-term bills issued by the euro bloc's leading economies, while two-year German bonds were last yielding -0.002 percent on Wednesday.
Ten-year yields were little changed at 1.32 percent, while the Bund future dipped 9 ticks to 144.02.
Germany taps 5 billion euros of its 2022 bond on Wednesday, in a sale supported by almost 40 billion euros of German redemption and coupon payments this week.
Euro zone finance ministers this week agreed to grant Madrid and extra year to reach its deficit reduction targets and set the parameters of an aid package for Spain's ailing banks.
But the meeting did little to iron out uncertainties surrounding the more flexible use of the euro zone rescue fund agreed at a recent EU summit that has since faced some opposition.
Adding to concerns, Germany's top court agreed on Tuesday to examine complaints lodged against the European Union's bailout fund and new budget rules but gave no date for its verdict, keeping investors on tenterhooks..
Trading in higher-rated debt was choppy and Monti's comments only had a limited impact on the euro zone debt market, with analysts saying they were too vague for a decisive interpretation.
Ten-year Spanish government bond yields fell 2.3 basis points to 6.80 percent, while Italian 10-year yields were steady at 5.94 percent.
"In my interpretation they are interested in the ESM/EFSF using their newly given flexibility/capacity to intervene in secondary markets. They would like to see the ESM or the EFSF or take over the role of the ECB," Elwin de Groot, strategist at Rabobank said.
But Finland has recently opposed the use of the euro zone rescue fund for the purchase of bonds from struggling member states. Even if it happens, the fund is not considered to have enough firepower for the bulk-buying analysts deem necessary to decisively contain a rise in Spanish and Italian yields.
Later in the day, investors will look to minutes from the US central bank's latest monetary policy meeting for further insight into the thinking of the Federal Reserve. A disappointing jobs report last week reinforced bets that it will eventually embark on a third round of quantitative easing.
Copyright Reuters, 2012