LONDON: Spanish government bond yields held near recent lows on Thursday with relief the country had avoided a credit rating cut and expectation it would seek financial aid set to support a bond auction.
Spain's borrowing costs were expected to fall at the sale of up to 4.5 billion euros of 2015, 2016 and 2022 bonds. Demand for the 10-year paper is seen as an important indicator of investor confidence as the longer-dated debt is outside the scope of any European Central Bank bond-buying plans
Sentiment towards Spain has brightened this week after Moody's affirmed the country's investment grade credit rating and with Madrid expected to ask for aid soon.
An aid request would clear the way for the ECB to buy Spain's bonds, a move that should prevent yields heading back towards unsustainable levels.
Ten-year yields exceeded 7.6 percent in late July. On Thursday, they were slightly higher on the day at 5.50 percent, having hit their lowest in over six months on Wednesday. The spread over German Bunds stood at 388 basis points after falling below 400 bps for the first time since April on Wednesday
"There's been some buying of Spain, some covering of short positions and decent (cash) flow into the periphery so the money is behind the ECB at this point and if they come in aggressively and are successful then there's certainly more room for spreads to converge," said ING's head of investment grade strategy Padhraic Garvey.
European Union leaders meeting in Brussels were set to focus on plans for a banking union, with discussions about Spain, and even Greece, on the sidelines, reviving concerns about complacency in tacking the three-year old debt crisis .
But with the prospect of an aid package and ECB bond buying, Thursday's Spanish auction was expected to go smoothly.
"Today's supply from Spain, if well received, could indeed trigger another leg lower for Bunds," Credit Agricole rate strategists said in a note.
"We see good stamina in the most recent bout of periphery optimism and suspect that this could mean markets now enter Spanish auctions more expectant of finding decent demand."
France was due to sell up to 8 billion euros of shorter-dated debt and 2.5 billion euros of inflation-linked bonds.
German Bund futures were 5 ticks higher at 139.79, reversing early losses after two days of falling prices.
"(Interest) rates aren't going up so it's questionable how far Bunds can sell off," a trader said.
"But you're looking at the carry trade into year end and even though some of those semi-core spreads over Bunds are looking a bit compressed, it's hard to fight it just now," he said, referring to market players selling lower-yielding bonds and buying higher-yielding bonds.
The French 10-year yield spread over Bunds, for example, has fallen to just 50 bps, its lowest since July 2011, while the equivalent Dutch spread at 23 bps is the lowest since March 2011.
German 10-year yields dipped half a basis point to 1.63 percent, still near the 1.70 percent top of the recent trading range after rising a total of around 15 bps on Tuesday and Wednesday.
"We wouldn't expect the recent move to be reversed to a significant extent, the path of least resistance for now is to higher yields," Garvey said.
"It's a positive tone out there from a spread perspective and that hasn't been reflected fully in Bunds yet."
Comments
Comments are closed for this article.