* ECB bond buying expectations push Spanish yields lower
* Lack of detail limits selling pressure on Bunds
* Borrowing costs fall at Spanish bill auction
By Kirsten Donovan
LONDON, Aug 21 (Reuters) - Spanish government bond yields fell on Tuesday as markets focused on prospects of the European Central Bank buying debt to contain the country’s borrowing costs, but a lack of detail over the process limited price gains.
Traders cited a story in Britain’s Daily Telegraph newspaper, which said it could confirm German media reports ECB experts were examining plans to cap Spanish and Italian bond yields, as a reason for the continuation of the trend begun on Monday.
The ECB tried to quash speculation on Monday that it would target specific interest rate thresholds as part of any bond-buying programme, referring back to the statement when asked about the Telegraph report.
With the prospect of eventual ECB action of some kind dominating trading, safe-haven Bunds fell, although within recent ranges.
“The leaks coming out at the moment are about quite significant things but the danger is there will be some quite onerous caveats,” said Rabobank rate strategist Lyn Graham-Taylor.
“You don’t really want to have a long position in Bunds because you could get absolutely smashed,” he added, referring to traders’ bets the market will rise.
Spain sold 4.5 billion euros of 12- and 18-month T-bills against the more favourable backdrop. Borrowing costs fell but stayed punishingly high.
“We expect Spain to continue outperforming Italy, especially in the short end, on continued expectations of... EFSF (bailout fund) and ECB support,” RBS strategists said in a note.
Spanish 10-year bond yields fell 11 basis points to 6.22 percent, with shorter-dated yields down as much 16 bps. Italian bond yields also dropped.
“People have been closing out their long positions in Bunds and there’s continued buying in Spain, particularly the five-year area,” a trader said, adding that he had seen some international investors looking to buy the debt.
“But it’s an extremely thin market and small trades are pushing prices around a lot.”
A second trader reported small-scale buying of Spain but predominantly by domestic investors.
International investors have been dumping Spanish bonds since late 2011 and accounting for little more than a third of the market now, compared with around 55 percent last year, according to Bank of Spain data.
September Bund futures were 53 ticks lower at 141.47, having failed in early trading to rise back above 142.00, which has been acting as resistance in recent sessions.
Ten-year Bund yields were 4.7 bps higher at 1.56 percent, having tested the 1.60 percent upper limit of their three-month range in recent days but failing to break above it, suggesting selling pressure may ease in the absence of further developments in the debt crisis.
Thin market conditions have exaggerated price moves in recent weeks and left traders at the mercy of news headlines.
September may prove to be decisive for markets. The ECB holds its next policy meeting on Sept. 6 and the German constitutional court will rule on ratification of the euro zone rescue fund on Sept. 12. European finance ministers meet on Sept. 14 and 15.
The expectation of mass ECB bond buying has already halved two-year Spanish yields over the last month.
“You should start to see some more positions being put on ahead of the ECB meeting,” Rabobank’s Graham-Taylor said.