LONDON: Spanish bond yields edged higher on Thursday before a debt auction that w ill gauge the strength of market pressure on Madrid to ask for a bailout.
Bunds were stable as the European Central Bank was expected to hold fire at a meeting on monetary policy, but the market will be watching for any clues on whether it is likely to ease policy again soon.
Spain aims to sell between 3 and 4 billion euros of two-, three- and five-year bonds at auction. Borrowing costs are expected to fall in line with secondary market prices and demand is expected to be sufficient to ensure a smooth sale.
If demand is disappointing that would put further pressure on Spain to seek a bailout.
Spanish bond yields were slightly higher across the curve, with 10-year yields rising 6 basis points to 5.88 percent. It is common for yields to rise before a debt auction as some investors make room for the new bonds.
Spanish bondholders would like to see the country ask for a rescue package that would pave the way for the ECB to buy its debt and analysts warn that it may not take too long for investors to lose patience with Madrid.
"The perception still is that it is more a question of when rather than if they will request a bailout ... Today's auction should still go OK," said Brian Barry, fixed income analyst at Investec.
"But the longer we will go through this bailout saga of whether they will or they won't, the more likely ... it is to see a weakening in demand at this kind of auction."
The uncertainty about the timing of a bailout request has kept bond markets in a tight range in recent days. No strong impulse is expected from the ECB meeting either, with the bank expected to hold its main reference rate at a record low 0.75 percent.
Some economists expect the ECB to cut rates further by the end of the year and may look for signals on future policy moves from President Mario Draghi in his news conference at 1230 GMT.
The impact of that would be limited, however, as investors would be reluctant to bet on any firm gains in German Bunds given the possibility of Spain asking for aid at any point - a move which could dampen appetite for safe-haven assets.
"It doesn't seem like there is a lot of conviction on what the next trade is out there and positioning is pretty square," one trader said.
He said the focus of Draghi's news conference would be Spain, but analysts said he is unlikely to say anything other than that he is waiting for struggling euro zone members to make a request for aid before the ECB will consider any intervention.
"They showed their cards the last time," Investec's Barry said.
Bund futures were 2 ticks higher on the day at 141.61. Investors will also focus on jobless claims data due out of the United States on Thursday and the US non-farm payrolls report on Friday.
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