LONDON: Spanish government bonds rose on Wednesday after good demand at an auction but are vulnerable to renewed downward pressure given ongoing talk of a Greek debt restructuring and uncertainty about the implications of such a move.
Spain attracted solid demand for its bonds after 10-year yields were pushed higher -- to just 20 basis points below euro lifetime highs -- in recent sessions by a sharp selloff in Greek, Irish and Portuguese debt.
Ten-year Spanish yields eased by 10 basis points after the sale to 5.45 percent, before rebounding to 5.49 percent.
The recent surge in yields had sparked concern that Spain was being dragged back into the crosshairs of investors looking for the next candidate for an international bailout. The auction was seen as a test of whether Madrid was still seen as insulated from Portugal, Greece and Ireland, which have sought help.
"The auction went well ... but they are still very much under the hammer, because if Greece starts restructuring its debt, Spain is going to be embroiled in the crisis," said Alan McQuaid, chief economist at Bloxham Stockbrokers.
McQuaid said Spain needed to do more to convince investors it can deal with the crisis on its own, and that markets will become increasingly concerned if 10-year yields hit 6 percent.
"Most people would say 7 percent is the critical point for a 10-year bond (yield), but if you get over 6, you're heading in the wrong direction," he said.
In neighbouring Portugal, which is negotiating the terms of a pending aid deal, 10-year yields hit fresh euro lifetime highs at 9.65 percent after LCH Clearnet raised the margin required to hold long positions on Portuguese government debt.
Greek and Irish yields have also hit fresh highs, with Irish 10-year paper yielding 10.44 percent, up 41 bps on the day. A selloff of their debt began last week when Germany suggested that Greece may have to restructure its debt.
A Reuters poll showed on Wednesday that 46 of 55 economists believe Greece will have to restructure, but more than half of them said it would be at least a year before it happened.
RECOUPLING?
Market sentiment on Spain, Italy and Belgium had seemed to be decoupling from the debt woes of Portugal, Greece and Ireland since mid-March. That view has now faded after bond yields of the three bailed-out states surged, dragging bond yields of the more liquid peripheral issuers higher.
"Recent price action suggests that all periphery paper will remain under pressure," said Credit Agricole rate strategist Luca Jellinek.
"However, as we have experienced since late last year, fundamentals also matter and on that front the situation is less unforgiving for Spain and Italy."
June Bund futures were last 20 ticks lower at 121.97, weighed down by sharp gains in equities on the back of solid first-quarter corporate results. Ten-year yields were up 3.2 bps at 3.306 percent, but still lower than a week ago when they failed to break through 3.5 percent.
"If we can get back above 3.33 percent -- the previous double top and a bit of a pivotal point -- then we'll probably see another selloff," a trader said.
A recent slight outperformance of German bonds versus equivalent French bonds should bode well for Paris' plans to sell up to 8.5 billion euros worth of conventional bonds on Thursday, analysts said.
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