LONDON: Spanish government bonds held steady after a debt auction on Thursday showed domestic banks were still willing to buy sovereign debt, but underlying selling pressure in the market was unlikely to go away soon.
In France, a solid debt sale pushed yields slightly lower, suggesting markets were becoming more open to the possibility of presidential election favourite Francois Hollande being less fiscally disciplined than incumbent Nicolas Sarkozy.
Intra-day trading ranges were limited ahead of a European Central Bank meeting later in the day. Recent weak data has revived interest rate cut expectations for later this year and markets have positioned themselves for a slightly dovish tone to President Mario Draghi's speech.
At 1036 GMT, Spanish 10-year bond yields were 2.8 basis points lower at 5.84 percent, little changed from levels seen before the auction.
"Overall (the auction) was quite good, they sold the full amount, bid/cover was quite high, it sends the message that the Spanish banks can still support auctions," Lloyds rate strategist Achilleas Georgolopoulos said.
"(But) Spanish spreads will remain under pressure. There's nothing significant coming up that can help them. The only thing to improve the situation would be better data across Europe."
The sharp rise in the auction yield remained a worry, though. Also, analysts said that in the context of persistent concerns about Spain's public finances, domestic banks may not be willing to take more government risk on their books for much longer.
"The effect of the three-year LTROs (ECB's injections of about 1 trillion euros into the banking system) is losing steam and risks for Spanish spreads are elevated in the weeks ahead," said ING rate strategist Alessandro Giansanti.
DRAGHI, HOLLANDE, BARCELONA
Lloyds' Georgolopoulos did not expect the ECB meeting in Barcelona to provide any relief for Spanish bonds, adding that those who expected Draghi to send signals that he was willing to ease monetary policy further may be disappointed.
German Bund futures were 14 basis points lower on the day at 141.59, with investors pausing after a rally sent the June contract at a record high of 141.83. Two-year German yields , more sensitive to monetary policy moves, remained close to record lows below 0.10 percent.
"People are looking for slightly more dovish rhetoric from the ECB given recent data," one trader said.
"But I can't imagine we'll see a big selloff if they disappoint given all the other problems in the euro zone. It may just provide a buying opportunity."
In France, the debt auction went better than expected, given recent unease caused by policy uncertainty related to the presidential election. Socialist Hollande has expressed a willingness to renegotiate the euro zone's fiscal rules, urging the bloc's policymakers to put more emphasis on growth.
French 10-year yields were 5.4 bps lower at 2.919 percent. For auction details see
"It looks like some of the uncertainty related to the presidential election hasn't weighed too much, they managed to get the full amount away with lower yields and decent bid/cover," WestLB fixed income strategist John Davies said.
"There's a realisation that pure austerity alone may not work. The conflict that the market had perceived to happen if Hollande came to power may not be as insurmountable as first thought."