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EURO GOVT-Bunds steady, market wary of Spain crisis response
June 5, 2012 / 3:21 PM / 5 years ago

EURO GOVT-Bunds steady, market wary of Spain crisis response

 * Spain's Treasury Minister says country shut out of market
 * Bunds steady as expectations of policy response grow
 * Comments ramp up pressure on Thursday's Spanish auction
 By William James and Marius Zaharia	
 LONDON, June 5 (Reuters) - A rise in safe-haven German bond
prices after Spain said it was becoming shut out of bond markets
proved short-lived on Tuesday, suggesting some investors see a
growing chance the country will take external help for its
banks.  	
 Treasury Minister Cristobal Montoro said the country's high
borrowing costs meant "Spain doesn't have the market door open",
adding that the European Union should help to recapitalise its
fragile banking sector. 	
 That upset jittery investors, increasing demand for the
safety of German debt futures, which rallied to a
session high of 146.34 before appetite for riskier assets
recovered, also helped by solid U.S. economic data.	
 Bund prices were last flat on the day in thin trade on the
second of two bank holidays in Britain.	
 Worries that the cost of rescuing Spain's banks may be too
high for the country's already-stretched public finances sent
the risk premium on Spanish debt to a euro-era high last week
while German debt prices rallied to record levels.	
 However, Bund futures have retreated from those highs and
Spanish 10-year bond yields fell 9 basis points on
Tuesday to 6.32 percent, with traders citing growing momentum
behind calls for fresh crisis-fighting measures from Europe's
policymakers.	
 "What we have learnt since the weekend is that all the talk
about a bigger solution, a bigger response from the politicians
is gaining some steam," said Rainer Guntermann, strategist at
Commerzbank in Frankfurt.	
 "At the same time it doesn't look like they have a quick fix
at hand, not a fundamental game changer at this point in time."	
 Emergency talks between G7 financial chiefs produced verbal
support for the euro zone in light of Spain's problems and the
possibility that Greece may be forced to leave the bloc, but
little sign that concerted action was imminent. 	
 The prospect of a decisive crisis response from politicians
before a EU summit on June 28-29 looked slim, leaving the focus
on  a Spanish debt auction of up to 2 billion euros of medium-
and long-term bonds on Thursday. 	
 While analysts shared Montoro's view that Spain's borrowing
costs are too high, they said Madrid still had market access.	
 "I don't think markets are closed for Spain ... I think he
meant to say something else," BNP Paribas rate strategist
Patrick Jacq said, adding that the small size of Thursday's
auction should ensure the sale will not flop.	
 "If the recent bias on Spanish yields will go on further,
especially for the five- to 10-year area, at some stage it will
be a big problem for Spain ... but so far it's manageable."	
	
 POLICY HOPES	
 Some in markets speculated the European Central Bank may
come up with steps to defuse the crisis at its regular policy
meeting on Wednesday.	
 Speculation the ECB may ease monetary policy has grown in
recent days, but such bets carry high risk. Most economists in a
Reuters poll expect the central bank to hold fire.
 	
 ING rate strategist Alessandro Giansanti estimated the
forward overnight Eonia euro interbank rate market 
priced in a 22 percent probability that the ECB will cut rates
by 25 basis points from a record low of 1 percent.	
 "Markets are still speculating on that and also on some kind
of measures on the banking side, like creating some kind of 
deposit insurance or allowing the EFSF or ESM (bailout funds) to
directly help banks," Giansanti said. "There is still a lot of
uncertainty regarding policy actions."	
 Other clues to possible policy steps may come in testimony
by U.S. Federal Reserve Chairman Ben Bernanke on Thursday.	
	
 (Editing by Nigel Stephenson)	
 	
 

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