Spanish yields steady as debt auction seen smooth

LONDON: Spanish government bonds were steady on Thursday before an auction that is expected to draw strong demand as investors seek to maximise returns in an environment of low official rates.

Expectations that the European Central Bank will ease policy further after it cut its key rate last week to 0.50 percent are keeping Bunds yields close to record lows.

But those meagre returns are also pushing buyers toward other higher yielding euro zone bonds, lowering the premium they offer over the German benchmark.

The trend is likely to continue in the near-term as no major central bank is seen making a U-turn from their current ultra-easy policy any time soon, analysts said.

Bund futures, a safe-haven asset that throughout the financial crisis has usually weakened when appetite for riskier assets picked up, were last 16 ticks higher at 146.01.

Spanish 10-year bond yields were 1 basis point lower at 4.10 percent. The country aims to issue between 3.5 billion and 4.5 billion euros of 2016, 2018 and 2026 bonds.

"We've got Spanish supply to contend with but I expect it will be fine in the current environment," one trader said. "As much as the periphery rallies at the moment I don't think it will weigh on Bunds. Bunds are cheap given the rate outlook."

Lower-rated euro zone issuers have been successful in May.

Portugal found strong foreign demand for its first 10-year bond sale since its bailout in 2011 on Tuesday, while Slovenia, just two days after Moody's downgraded it to junk status, borrowed $3.5 billion to stave off a bailout last week.

Greece, which has been bailed out with some 200 billion euros in loans from the European Union and the International Monetary Fund since May 2010 and has restructured its debt last year, hopes to come back to the market around the end of 2014.

Even though the weaker euro zone economies are yet to show signs of recovering and their debts and budget deficits remain stubbornly high, analysts see their bonds rallying further and some are shy of ruling out Greece's market comeback.

"There is a lot of liquidity in the market offering support for the periphery. If this situation continues ... and the economy improves there (in Greece) then (a return to markets) is a possibility," said UniCredit strategist Luca Cazzulani.

"But the end of 2014 is so far away that the uncertainty of any forecast is huge, especially as Greece is a country where many things are unclear. So I will not make a (prediction)."

Greek 10-year yields were 2 bps lower on the day at 9.64 percent, having hit a post-restructuring low of 9.56 percent earlier in the session. In June 2012, at the height of market fears that the country might leave the euro zone, its yields topped 30 percent.