LONDON: Spanish bond yields eased on Tuesday ahead of a bill sale that will give an indication of sentiment before Madrid auctions longer-term debt later in the week, but mounting worries about the country kept safe-haven German Bunds close to record highs.
Spain, currently at the forefront of the euro zone debt crisis, will sell 12-month and 18-month Treasury bills on Tuesday. Yields on the country's debt have soared in recent sessions as doubts it can meet budget targets grow, and on worries about the health of its banking sector.
"Given the importance of everything concerning Spain this is the one to watch today," said DZ Bank rate strategist Michael Leister. "The yield levels compared to the last sale will look rather nasty ... but in terms of the bid/cover anything below 2 would really raise some eyebrows."
Spanish 10-year bond yields rose above 6 percent on Monday for the first time this year, with no sign that the European Central Bank would restart its bond buying programme as many had hoped.
The yields eased a little on Tuesday, however, with traders saying market players were reluctant to hold large short positions going into Thursday's bond auction given the relatively small 1.5-2.5 billion euro target size.
Ten-year Spanish yields were last 5 basis points lower at 6.02 percent.
"We're seeing some decent buying of Spain so we may get a bit of a squeeze ahead of the auctions," a trader said.
"The auction is probably attractive to domestic banks at these yield levels and there's going to be a bit of arm twisting to buy it, so you probably don't want to be short going into it."
Six percent is an important psychological level. Although not a prohibitive funding cost in itself, once past that level other troubled euro zone countries such as Greece, Portugal and for a while Italy, have seen the pace at which their yields have risen accelerate rapidly into unsustainable territory.
"The prognosis for Spain is looking troubled," said ING rate strategist Parhraic Garvey.
"Spain likely has a few quarters at best in order to right the negative sentiment that dominates right now. Investor flows will remain key here ... Spain remains the big negative sentiment play over the coming months."
The increasing jitters surrounding Spain and spilling over into the wider periphery have led to a sharp rally in German bonds, viewed as the safest in the euro zone.
June Bund futures were 16 ticks lower at 140.23 after touching a record high of 140.56 on Monday. Ten-year yields were up two basis points at 1.65 percent after falling as low as 1.622 percent the previous day.
"Over the longer-term there is scope for Bund yields to fall further as the story has not changed, the debt crisis is evidently lingering on, the money has to go somewhere and you will get the flight-to-quality," said DZ Bank's Leister.
"But that's not going to be a straight line, you are going to see these periods where spreads tighten."
Data may lead to some volatility for markets with the German ZEW economic sentiment survey expected to fall after the euro zone debt crisis intensified again and the final reading of euro zone inflation in March also due.
Comments
Comments are closed.