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EURO GOVT-ECB cash supports Bunds; to help Spanish auction
March 1, 2012 / 9:21 AM / 6 years ago

EURO GOVT-ECB cash supports Bunds; to help Spanish auction

* Bunds stay near record highs

* Italian yields grind lower, reversal seen

* Spain to sell up to 4.5 bln euros of bonds

By Kirsten Donovan and Alessandra Prentice

LONDON, March 1 (Reuters) - German government bonds hovered near record highs on Thursday, while yields on Italian bonds nudged lower as the European Central Bank’s massive liquidity injection the previous day supported most euro zone bond markets.

Spanish bonds underperformed their Italian equivalents however before a sale of up to 4.5 billion euros of shorter-dated paper and there was little respite for Portuguese paper with concerns that any Greek-style restructuring could subordinate current bondholders.

An additional half trillion euros of three-year European Central Bank funds was added to the financial system on Wednesday, briefly pushing Bund futures to an all-time high of 140.28 and shorter-dated Italian yields to multi-month lows.

“The market appears very happy with the outcome of the ECB financing operation,” said Michael Leister, rate strategist at DZ Bank.

“Italy stands out...but at the same time the Bund went to an all-time high. This indicates that although the liquidity is helping peripherals by easing funding concerns, the more fundamental problems remain unsolved, so demand for safety is still strong. We expect this to continue.”

March Bund futures were 1 tick lower at 139.88 with 10-year yields flat at 1.82 percent.

“Bunds are trading well against a backdrop of fairly risk-positive news so what happens when there’s actually some bad news?” a trader said. “It just feels like there’s a wall of cash out there and some people are getting forced into the market with some of the technical moves we’ve seen lately.”

UBS technical analyst Richard Adcock said the outlook for Bunds remained positive while they traded above 139.29, although for a longer-term advance a close above the trendline joining the September 2011 and January highs at 140.74 would be needed.

The ECB cash will support Spain’s bond sale.

If Spain sells the full amount it will have completed 40 percent of its funding needs for 2012 after racing ahead with issuance in the first two months of the year as domestic banks reinvested the ECB cash in their sovereign bonds.

But there is a risk that funding requirement may have to be revised up with Spain pushing for more leeway in meeting its 2012 budget deficit target.


RBS said the recent collapse in yields at the short end of the Italian curve may have gone too far, with two-year yields another 10 basis points lower at 2.12 percent.

“Despite the very near-term positive for short-end periphery, we think that two-year BTPs at current levels look astonishingly rich given that they are now trading a mere 13 basis points above their 2010 second-half average,” the bank’s strategists said.

At that time moves in BTPs were closely correlated with those of Bunds as all government bonds were seen as relatively safe.

“Two-year BTPs are as rich as they were in times when markets’ perception of Italy was far more positive.”

With the Italian yield curve steepening almost 40 bps this week, RBS suggests positioning for a re-flattening of the curve.

France will also sell up to 8 billion euros of longer-dated bonds.

Meanwhile, The International Swaps and Derivatives Association, the arbiter of rules governing the sale and use of credit default swaps meets on Thursday to determine whether Greece’s debt swap should be considered a credit event as a deadline for bondholders to agree to the process looms.

“The big focus will now be on the (debt swap)...Now that the ECB has played its part the focus will switch back to politicians and their efforts to solve the crisis,” DZ Bank’s Leister said. (Editing by Nigel Stephenson)

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