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Spain yields rise as supply weighs, Greece in focus

LONDON: Spanish government bond yields rose on Thursday as an unexpected issue of debt the previous day tempered investo
09 Feb 2012

 LONDON: Spanish government bond yields rose on Thursday as an unexpected issue of debt the previous day tempered investor demand, though any progress towards Greece receiving bailout funds was likely to spur fresh appetite for risk.

Greece's battle to avoid default still dominates sentiment with Bund futures falling 15 ticks to 137.69 as markets cautiously anticipated the release of bailout funds, despite Greek leades failing to agree their part of the deal.

Spanish 10-year yields were 12.5 basis points higher on the day at 5.368 percent after the country continued its aggressive fund-raising activity with an unexpected syndicated debt sale on Wednesday. "It's a supply overhang. The deal was cheap and has repriced the whole market. People got their full allocations, from what I'm hearing," a trader said.

Nevertheless, market participants said the Spanish sell-off could be short-lived if Greece secured the international aid it badly needs, reducing the risk of a messy Greek default and the subsequent contagion.

"Certainly, that (an agreement) would be risk positive and there still would be a knee-jerk reaction," said Peter Chatwell, rate strategist at Credit Agricole in London.

Euro zone finance ministers, due to meet on Thursday evening, had hoped for a complete agreement from Greek party leaders on budget cuts to speed approval of the 130 billion euro bailout, the country's second.

But, despite agreeing most of the required cuts, Finance Minister Evangelos Venizelos left Athens for the Eurogroup meeting in Brussels with one issue unresolved.

Nevertheless, markets took the fact that a single hurdle remained in the drawn-out process of agreeing the reforms demanded by international lenders was as positive. An accord has been priced in over recent days, with safe-haven German yields ticking higher.

"Our target is that the (10-year) yield should be in the area of 2.15 percent so we see some pressure to the upside if there is a positive outcome to the Greek debt situation," said Alessandro Giansanti, rate strategist at ING in Amsterdam.

The 10-year yield was last at 1.985 percent, 1 basis point higher on the day and still struggling to break conclusively above the 2 percent level which has formed the upper end of a roughly 20 bps range seen since the start of the year.


The European Central Bank's policy meeting later in the day was set to play second fiddle to developments in the Greek saga, with few expecting the bank to cut interest rates or announce new liquidity measures to support the banking sector.

The ECB may, however, indicate its willingness to cut rates at next month's meeting. Its reluctance to pre-commit on rate cuts meant the main risk was that it would rule out a cut, leading to a pricing out of the partial expectations indicated by Euribor futures prices.

"If today they exclude any possibility of a rate cut, the market can sell off, particularly at the front end," ING's Giansanti said.

The bank was also expected to face questioning over whether it was considering taking losses on its holdings of Greek government bonds to help ease Athens's debt burden with any sign of concession being taken as a positive for riskier assets.

"Anything that would lower the debt burden on Greece would be viewed as a market positive," Credit Agricole's Chatwell said.

The Bank of England was also meeting, with widespread expectations it will announce fresh quantitative easing leaving UK bond markets vulnerable to disappointment. This may in turn add to downward momentum in Bunds prices.

Copyright Reuters, 2012