July 5, 2012 / 3:18 PM / 8 years ago

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
    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
    "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
    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.
    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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