Spanish yields edge up before auction

LONDON: Spanish bond yields edged higher ahead of an auction on Wednesday, while low-risk German yields also rose but were seen capped in coming days by market concerns about US budget risks.

Spain was expected to find solid demand from investors at its debt auction, even at the current relatively low yield levels after expectations Greece's debt-reduction plans will succeed sparked a strong rally in peripheral bonds this week.

"You could argue there's been no concession for Spain, but given there's obviously plenty of demand out there this week it should go through OK," a trader said.

Ten-year Spanish bond yields were 3 basis points higher at 5.29 percent as the looming new supply stalled a rally that pushed yields to their lowest since March on Monday.

The market's 'risk-on' mood this week was fuelled by the announcement of better-than-expected terms on a Greek bond buyback, increasing the chances of a successful debt reduction and the payment of badly-needed aid.

German Bund futures, which rise in times of market stress, were 10 ticks lower at 142.64, giving back modest gains made on Tuesday, but low-risk debt was still expected to find support over the coming weeks from uncertainty over US budget talks.

Policymakers across party lines in the United States are trying to hammer out a deal to avoid a series of tax rises and spending cuts which would hamper a nascent economic recovery.

"If they don't resolve this fiscal cliff we've got this dread of their economy going back into recession which will have a real detrimental effect for the world," said Alan McQuaid, chief economist at Merrion Stockbrokers.

"If it's resolved I think safe havens will sell off a bit and then we come back next year... but the market will still be nervous with elections in Italy and Germany coming up (in 2013)."

Germany sells two-year debt later in the session which was expected to easily find buyers, helped by a rise in yields this week that has pushed the returns offered on the Schatz bonds back above zero.

After the day's debt sales, focus will shift to US data, with ADP employment figures guiding expectations for Friday's headline non-farm payrolls report which is used as a key indicator of the US economy's health.