Spanish yields fall on bank audit relief

LONDON: Spanish bond yields fell on Monday after an audit of banks showed extra capital needs in line with forecasts, but relief was seen short-lived on doubts over when Madrid will seek a bailout.

German Bund futures extended losses from late Friday after the independent audit of Spanish banks showed a 59.3 billion euro capital shortfall in the event of a serious economic downturn.

 Markets were expecting 60 billion euros and the result was welcomed by the European Central Bank - which is on standby to buy the bonds of struggling sovereign issuers provided they ask for aid - the IMF and the European Commission.

Spanish 10-year yields were six basis points down at 5.92 percent with 5-year yields down by a similar amount at 4.93 percent.

Traders and strategists said scope for further falls was limited given uncertainty over when Spain would seek aid to activate the ECB scheme.

"The stress tests results are supportive of the periphery but the problem now is we are waiting for developments on when Spain will ask for aid...," BNP Paribas strategist Patrick Jacq said.

"I don't think there will be significant moves lower in Spanish yields in the near term. The market will wait for a decision on the aid request before going either on the upside or downside."

Investors were also sidelined by apprehension over a review by credit agency Moody's, which has Spain on one notch above "junk" with a negative outlook.

The agency could push the ratings below investment grade, triggering a wave of selling from investors with funds pegged to benchmark indexes.

"We could see a wall of forced selling at the (long) end while the short end will probably be supported by the prospect of ECB buying," a trader said.

Nevertheless, relief over the bank audit prompted some investors to book profits in safe-haven German Bunds after their rally last week.

December Bund futures were last down 36 ticks on the day at 141.41 with German 10-year yields up 3.5 bps at 1.464 percent.

"Bunds are down in line with late Friday trading after the stress test results but nothing much has changed," another trader said.

"I don't think there are any signs of (Spain) about to request (aid), therefore Spanish bonds will probably remain under pressure."

BNP Paribas's Jacq said that, given the uncertainties over Spain and renewed investor concern over the global growth outlook, 10-year Bund yields could drop below 1.40 percent in the coming week.