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Spanish yields edge up before bond auctions

LONDON: Spanish yields nudged higher on Thursday before Spanish and French debt sales which were nonetheless expected to
02 Feb 2012

 LONDON: Spanish yields nudged higher on Thursday before Spanish and French debt sales which were nonetheless expected to go well while signs a Greek debt swap deal was nearing completion limited price gains in German Bunds.

Spain is set to maintain the trend of strong sales from the euro zone periphery at an auction of up to 4.5 billion euros of three-, four- and five-year bonds.

Spain has sold more than its target amount at its last two auctions helped by strong buying by domestic investors flush with liquidity provided by the European Central Bank. As a result, the sovereign has completed almost a fifth of its 2012 funding.

"We will certainly get upper range plus," said Norbert Aul, rate strategist at RBC Capital Markets.

However, Spanish bonds came under pressure in the secondary market after a larger-than-expected auction two weeks ago as dealers struggled to absorb the additional supply.

"For the dealers it matters what comes to the market as they have to hedge their exposure and this could become problematic when we get nowhere close to the indicated amount," Aul said.

However, any dips are likely to offer further buying opportunities given the recent rally in Spanish paper thanks to the abundant banking sector liquidity and the generally positive view of riskier assets in financial markets.

The yield spread of the Spanish April 2021 bond over Bunds was 7 basis points wider at 287 bps ahead of the auction but still around its tightest since August.

France also sells up to 8 billion euros of bonds, including a new 10-year OAT.

March Bund futures were 25 ticks higher at 139.49, with 10-year cash yields 2 bps lower at 1.823 percent.

"People are expecting the auctions to go well and the risk is Spain will, if the bids are there, do more again," a trader said. "There's no reason why the periphery should be under pressure this morning and supply should go OK."

The trader said there had been good buying of particularly Italian bonds on Wednesday from both domestic and, more significantly, international accounts.

Italian 10-year yields were 8 bps higher at 5.78 percent but almost 2 percentage points below their peak of 7.5 percent hit in November.

That move has narrowed the spread over Bunds to 395 bps, the least since early December, while the improved market liquidity is reflected in the bid/offer spread more than halving to 50 cents through January.

That remains high compared with a fully functioning market where the spread is typically just a few cents.

Bankers said the Greek bond swap deal, which will mean real losses of about 70 percent for bond holders, was essentially done. But the second bailout and any official sector participation must be agreed before announcing an agreement as all elements are interlinked.

"They have secured the private sector involvement and now the sticking point is what Greece has to offer and whether the IMF and EMU sovereigns find a common denominator," said RBC's Aul.

"But what has become clearer is that there won't be any kind of disorderly default and this is what has been driving the market and taken the tension out of discussions."

Copyright Reuters, 2012