Spanish yields hit 5-month low in ECB afterglow

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

Spanish benchmark 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 euro zone 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 fell slightly to 5.68 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 crisis, rose as investors pocketed profits.

Equivalent Italian yields were also higher after Italian Prime Minister Mario Monti said his country would not accept additional conditions being attached from any ECB support.

"It makes sense to see some stabilisation and even a limited setback due to profit-taking given the huge rally we saw," said Patrick Jacq, a strategist at BNP Paribas.

"The market is waiting for a decision from Spain within the next couple of weeks otherwise if Spain rules out any support from the EFSF then there will probably be selling pressure."

Traders said flows were light with investors wary of taking big positions before Germany's top court rules on the legality ESM fund on Wednesday, though many expect a positive outcome.

All 20 legal experts polled by Reuters last week expect the constitutional court judges to let the ESM and a European fiscal discipline pact go ahead, but most expect them to add tough conditions for future bailouts.

"The market is bound to be jittery before the German decision but I think it will be passed," a trader said.

FED STIMULUS EYED

German Bunds fell in choppy trade, led by 30-year paper with some traders citing position-squaring in the wake of the ECB's latest crisis-fighting measures.

But traders ruled out a sharp sell-off after weak Chinese data and as speculation, fuelled by weak US jobs numbers on Friday, that the US Federal Reserve could introduce fresh monetary stimulus supported Treasuries.

"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 down 39 ticks at 140.27 with 10-year German yields 3 bps up at 1.52 percent while 30-year Bunds yielded 2.42 percent, up 8 bps.

While Bunds regained ground against Treasuries, widening their 10-year yield spread by 2 bps to 12 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.