-- Spanish, Italian yields rise as more doubts emerge about EU summit measures
-- Sell-off continues despite ECB cutting rates to record lows
-- Borrowing costs rise at Spain's bond auction although demand remains solid
-- Ireland bucks the gloom with successful return to debt markets
(Adds auction results.)
By Tommy Stubbington and Emese Bartha
A sell-off in Spanish government bonds intensified Thursday despite
the European Central Bank's decision to slash interest rates to record
lows, as the country was forced to pay higher yields at a debt
auction, in a sign that optimism following last week's European Union
summit is fading.
Spain's debt has now erased the majority of the gains of the past
week, as doubts over the details of reforms agreed at the summit
continue to mount.
Italian yields also rose, further taking the gloss off the rally in
peripheral debt that began when the summit delivered more than markets
had hoped for.
The ECB cut its benchmark interest rates by 25 basis points each,
bringing the refinancing rate to a record low of 0.75%, and the
overnight deposit rate to 0%. Explaining the decision to slash rates,
ECB president Mario Draghi said its fears of a broad economic slowdown
across the currency area have materialized as the debt crisis drags
on.
But any hopes that the move would calm tensions in Spanish and Italian
bond markets were swiftly dashed, with traders saying some investors
had been hoping for additional steps from the ECB, such as a further
three-year liquidity operation.
"There was a bit of speculative positioning anticipating another
longer-term refinancing operation. We didn't get that and we've seen
unwinding of long positions since then," said the head of trading at a
market maker.
"Volumes are also light which has exacerbated this sell-off," he added.
Still, there was relief for at least one of the euro-zone's fiscally
weaker members, as Ireland marked its return to the debt market after
more than 18 months with a solid auction of treasury bills.
A challenge from Finland to plans to strip senior credit status from
EU rescue loans used to bail out Spanish banks has led some analysts
to question whether agreements reached at the summit were as clear-cut
as they seemed.
"We've seen this kind of pattern before with Greece: euro-area summits
are strong on promises. But when it comes to the detail, delivery is
lacking," said Ciaran O'Hagan, an interest rate strategist at Societe
Generale.
At 1410 GMT, Spanish 10-year yields were up 44 basis points at 6.79%,
while the equivalent Italian yield was 28 basis points higher at
6.02%, according to Tradeweb.
Yields on 10-year German Bunds fell by six basis points to 1.40% as
investors fled to the safety of German debt, while yields on two-year
German paper fell to just 0.02%.
Irish bonds showed little reaction to the sale of treasury bills, but
held on to recent gains, with the bond maturing in 2020 yielding
6.11%.
Spain sold the maximum targeted 3 billion euros ($3.771 billion) of
three-, four- and 10-year bonds, but had to pay higher yields on two
of the bonds compared with previous sales.
The country also had to accept some lower-priced bids in order to push
the amount through.
Still, bid-to-cover ratios were solid, indicating there is still
demand for Spanish debt.
"Today's Spanish auctions did not do much to change the overall
picture," said Jan von Gerich, chief strategist at Nordea, adding that
the sale of the maximum targeted amount was positive and coverage
ratios were "healthy" but this was largely in line with recent trends.
"There were thus no signs that last week's euro-zone summit results
would have boosted the auction performance, though such a boost was
never expected either," Mr. von Gerich said.
France also successfully sold EUR7.83 billion of bonds, with yields
falling from previous auctions.
Ireland, meanwhile, easily cleared its first hurdle upon returning to
funding markets, selling EUR500 million of three-month treasury bills
at yields below those on the equivalent Spanish paper. Ireland hasn't
sold bills since before its bailout in November 2010, and a successful
sale marks the first step on the road to regaining full access to the
bond market.
"Today's auction was symbolically important for Ireland and, as
expected, was very well received," said Nicholas Spiro, managing
director at Spiro Sovereign Strategy. In his view, the perception is
that last week's EU summit deal to use the euro zone's new rescue fund
to recapitalize banks directly will prove extremely favorable for the
Irish government.
Write to Tommy Stubbington at tommy.stubbington@dowjones.com
(END) Dow Jones Newswires
July 05, 2012 10:40 ET (14:40 GMT)
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