Spanish yields hit 5-month low in ECB afterglow

LONDON: Spanish 10-year yields hit five-month lows on Monday, with investors buoyed by European Central Bank bond-buying plans, but further falls were seen capped by uncertainty over when Madrid would seek aid to trigger the scheme.

Spanish yields fell below 6 percent for the first time since May on Friday after the ECB committed to buying potentially unlimited amounts of bonds issued by struggling countries in a bid to lower their borrowing costs.

 The bond purchases were, however conditional on the countries seeking help from the euro zone's EFSF and ESM bailout funds, a step Madrid has so far been reluctant to take.

Spanish 10-year yields were last 10 basis points down on the day at 5.59 percent, with some strategists seeing them falling to 5 percent in coming weeks if Madrid seeks help.

"We've had a good rally, the sentiment is positive and I think it will remain so near term but the market is very wary of Spanish authorities," RIA Capital Markets strategist Nick Stamenkovic said.

 "If they don't start to show an inclination towards going to the EFSF/ESM for financial assistance then markets are going to start to be increasingly nervous and we could start to see a reversal."

Shorter-dated Spanish yields , which have fallen the most over the past two months in anticipation of ECB action to tackle the debt crisis, were largely steady while Italian equivalents rose slightly.

Investors were reluctant to drive yields much lower before Germany's top court rules on the euro zone's permanent ESM rescue fund on Wednesday, though many expected a positive outcome.

"The market is bound to be jittery before the German Constitutional Court decision but I think it will be passed," a trader said. "Maybe we'll see another two days' rally in the periphery and if they (Madrid) don't ask for aid it's not going to be positive," a trader said.

 FED STIMULUS EYED

German Bunds edged up as weak Chinese macro data lifted demand for safe-haven debt and US Treasuries rose on speculation, fuelled by weak US jobs numbers released on Friday, that the US Federal Reserve could introduce fresh monetary stimulus.

"The weak growth profile is enough to make sure that Bunds don't sell off too far irrespective of what happens in peripheral government bonds," a trader said. "The Fed is still easing as the world economy is in a very fragile state. That's why we can't get too negative on Bunds."

Bund futures were last up two ticks at 140.67 with 10-year German yields flat at 1.49 percent.

 Concerns over euro zone struggler Greece also supported Bunds. The country's foreign lenders have rejected parts of a nearly 12-billion-euro austerity package prepared by the government, Greek officials said on Sunday, as the two sides resumed talks after a month-long hiatus.

 While Bunds regained some ground against Treasuries, widening their 10-year yield spread by 4 bps to 14 bps, RIA's Stamenkovic expects US bonds to resume outperforming their German counterparts if the Fed meets expectations of more bond purchases this week.

"With more burden-sharing on the horizon the outlook for Bunds is one for higher yields and I see Treasuries have scope to outperform Bunds in the near term. We could easily see the spread heading back towards zero in the next three to six months assuming the Fed does deliver," he said.