ECB steps in to ease Spanish pressure

 

Bund futures rose on Thursday driven by grim economic data from the euro zone and fresh signs that the ECB's recent intervention in bond markets was not enough to convince investors to buy new debt issued by Italy and Spain.

Spain launched a new five-year benchmark bond with a 3.6 billion euro sale but demand for the debt was weak despite an attractive yield relative to other Spanish paper.

Spanish and Italian yields rose across the curve, though the moves were limited with traders reporting the ECB was buying up the countries' debt in secondary markets.

The auction added to concerns, raised earlier this week by a lacklustre Italian debt sale, that even with the support of the ECB both Spain and Italy could struggle to finance themselves at affordable rates.

"The market now is not so willing to buy, especially after the spread tightening (over German yields). It will not be easy for Italy and Spain to issue in this environment," said Alessandro Giansati, rate strategist at ING in Amsterdam.

The bank began buying Spanish and Italian paper in early August to head off rising bond yields that threatened to reach unsustainable levels.

The Spanish 10-year bond yield was 1 basis point higher on the day at 5.068%, though traders said the ECB was absorbing the selling pressure in the market. Equivalent Italian yields were up 1.5 bps at 5.158%.

With investors fretting over the fate of peripheral economies, weak manufacturing activity data showed the region's economic slowdown was spreading, adding to the market's preference for lower-risk German Bunds.

"PMIs this morning were another blow... they were universally dire numbers across the member states," said Chris Scicluna, deputy head of economic research at Daiwa Capital Markets.

BUNDS TO KEEP RALLYING

Bund futures FGBLc1 rallied steadily throughout the session erasing early losses to hit high of 135.33, up over three quarters of a point.

In the cash market, 10-year yields fell 7 basis points to 2.12%. The move brought yields within 10 bps of their record lows hit last month with little sign that investor demand for safe-haven debt was slowing.

"Bund yields can certainly keep heading lower as we're heading into what's likely to be a very turbulent period in the euro zone," Scicluna said.

Markets remain on edge over the ongoing row involving a deal between Greece and Finland to back the latter's bailout contributions with collateral, which shows no sign of swift resolution and threatens to undermine the rescue deal.

The slow process of approving reforms to the region's bailout fund also meant Bunds were unlikely to reverse the uptrend which has been broadly in place since April.

Markets still remain sceptical that, even if approved, the package will be capable of drawing a line under the spread of the debt crisis to Italy and Spain.