LONDON: 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 helped support safe-haven German Bunds.
European officials told Reuters on Monday that Spain was ready to request a bailout as early as next weekend but Germany had signalled it should hold off.
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, allowing shorter-dated bond yields to drift back towards levels seen a month ago when the ECB detailed its plan.
"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," said Rabobank rate strategist Richard McGuire.
"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."
Yields on two-year Spanish bonds were 9 basis points lower at 3.32 percent, with their 10-year equivalent down 4 basis points at 5.85 percent.
Dealers may try and cheapen the paper before the sale of up to 4 billion euros of bonds with maturity of up to five years on Thursday, but the prospect of Spain making a bailout request should help the auction, McGuire said.
In addition, markets are awaiting the outcome of a credit rating review by Moody's which could see Spain lose its investment grade rating, something that would likely trigger a new round of selling of its debt.
International investors have been steadily reducing their exposure to Spanish bonds this year, leaving domestic investors holding almost 70 percent of the paper.
"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 to stand 5 ticks higher on the day at 141.45. Ten-year cash yields were little changed at 1.46 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.
"There's ongoing speculation about when Spain will ask for a bailout ... it doesn't feel like it's that close yet ... it's just dragging on," a trader said.
"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."
Austria will kick off the week's new issuance, selling 1.3 billion euros of 2019 and 2044 bonds.
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