EURO GOVT-Spanish, Italian bonds hammered after Draghi speech
* Bunds rise as ECB cuts refi/deposit rates * Spain sells 3 bln euros of bonds, longer yields rise * Ireland returns to market with bill sale By Marius Zaharia and Kirsten Donovan LONDON, July 5 (Reuters) - Spanish and Italian bond yields spiked on Thursday after European Central Bank President Mario Draghi failed to deliver any hint that bolder monetary easing steps were on the way after the bank cut rates earlier in the day. Following a surprise agreement at a European Union summit last week to give more powers to the euro zone's permanent ESM rescue fund, some market participants were hoping that the ECB would deliver a major policy boost as well. However, the central bank only cut its main refinancing rate to a record low 0.75 percent as expected, while reducing the deposit rate it charges banks to park cash overnight to zero. Draghi also dismissed the idea of the ECB boosting ESM funds. "The hope that the EU summit was going to be followed by something significant from the ECB has not materialised therefore we're back to where we were before the EU summit," said Nick Stamenkovic, bond strategist at RIA Capital Markets. "The worry is that the situation in Spain and Italy will get worse before it gets better and the euro zone will continue to remain a major threat to the global economy." Spanish 10-year bond yields jumped 41 basis points on the day to 6.81 percent, just a few basis points lower than the levels seen before the EU summit. Italian yields rose 21 bps to 5.97 percent. German government bonds rallied, favoured both by the lower official interest rates and safe haven flows stemming from the belief that the ECB may not have too many more tricks up its sleeve. Bund futures were 66 ticks higher at 142.98, while 10-year yields were 4.8 bps lower at 1.41 percent. "With regards to Draghi's press conference there wasn't too much to get excited about," DZ Bank rate strategist Michael Leister said. "The sell-off in the periphery doesn't seem intuitive given that the rate cut should provide some relief ... but it is a buy the rumour, sell the fact scenario. The peripherals had a good run and this may be the time for investors to reduce exposure." Meanwhile, the Bank of England launched a third round of monetary stimulus, while China surprised markets by cutting rates for the second time in two months. SPANISH AUCTION A rise in 10-year Spanish borrowing costs at a sale of 3 billion euros worth of three-, four- and 10-year bonds also raised tensions in peripheral markets. "The bidding (for the 10-year) was very scrappy," said Marc Ostwald, rate strategist at Monument Securities in London. "It's indicative of the lack of liquidity, it also is indicative that neither the domestic (investors) nor anybody else are confident that what has been cobbled together so far is any solution for Spain." Spain secured up to 100 billion euros of aid for its battered banking sector last month but concerns persist that the euro zone's fourth-largest economy will eventually need a full sovereign bailout. "We hold the fact that Spain rallied so much after the summit against it," one trader said. "It was due a pullback." While some "fast money" accounts such as hedge funds piled into the market after the summit to close out bets on the bonds falling further, traders consistently reported that they were not seeing any buying of the paper from longer-term investors. "It feels like the forced buying, the short covering, we saw after the summit has been done now," another trader said. France sold 7.8 billion euros of bonds on Thursday, with core paper supported by almost 40 billion euros of German redemption and coupon payments this week, and a further 50 billion euros of payments next week from triple-A rated countries including France, according to Reuters data. Meanwhile bailout recipient Ireland, whose five- and 10-year bond yields are currently below those of Spain, returned to the debt market for the first time since September 2010, selling 500 million euros of three-month T-bills Analysts had expected a yield of between 2 and 3 percent and said anything below 2 percent would be considered a success. "The yield of 1.8 percent is not only lower than the grey market before the auction but is approximately where Spanish bills are trading, so the parallels to Spain's debt market extend into the very short end," said Credit Agricole rate strategist Peter Chatwell.
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