EURO GOVT-Peripheral pressure eases, weak demand for Bunds

* Speculation of increased ECB bond buying lifts periphery

* Weak demand for German debt at auction, in futures market

* Portugal shrugs off rating warning, T-Bill yields rise

By William James

LONDON, Dec 1 (BestGrowthStock) – Pressure on the euro zone’s
higher-yielding debt eased on Wednesday as some traders bet the
European Central Bank could step up its bond buying programme
and as a poor German bond auction hit Bund futures.

Irish and Spanish bonds outperformed German debt, narrowing
their yield gaps over Bunds with some in the market believing
there may be further details of the ECB’s bond-buying programme
after its rate-setting meeting on Thursday.

Analysts said there was little to suggest an imminent change
to the scale of the bond purchase programme introduced in May to
stabilise markets, but nevertheless it was a risk that investors
positioned for a widening of yield spread could not ignore.

“I wouldn’t say this is a wholesale change of sentiment…
(but) this talk will certainly encourage people to take a bit of
the short position they’ve got in the periphery off the table,”
said Marc Ostwald, strategist at Monument Securities in London.

German Bund futures (FGBLc1: ) hit a session low after a
German five-year bond auction received total bids lower than the
amount on offer. [ID:nLDE6B00XE]

“Despite the cheapening we’ve seen this morning, apparently
there wasn’t too much demand to take the Bobl. Simply, market
volatility is keeping a lot of investors on the sidelines,” said
Michael Leister, strategist at WestLB.

The contract fell to a session low of 127.04 and erased
almost all the previous day’s gains.

The Irish/German bond yield spread (IE10YT=TWEB: ) narrowed by
23 bps on the day to 677 bps and the equivalent Spanish spread
(ES10YT=TWEB: ) was at 273 bps, also 23 bps tighter on the day.

The Portuguese debt shrugged off an overnight warning from
ratings agency Standard and Poor’s that it could face a credit
rating downgrade. The Portuguese/German 10-year yield spread
(PT10YT=TWEB: ) narrowed 22 basis points on the day to 426 bps.
[ID:nN30292510]

Portugal also proved it could still access short-term debt
markets with a 500 million euro sale of 12-month T-bills, but
the yield demanded by investors rose sharply. [ID:nLIS002518]

WEAK BUND PERFORMANCE

The flight-to-quality resulting from the euro zone debt
crisis has had a mixed impact on the 10-year sector of the
German curve in recent sessions, reflecting worries over the
impact on German finances if further costly sovereign bailouts
are required.

“We’re slowly coming round to the view that if the market is
picking countries off one-by-one eventually that’s going to have
some kind of impact on Germany as well,” said Alan McQuaid,
chief economist at Bloxham stockbrokers in Dublin.

The Bund future was last 75 ticks lower at 127.27

The 10-year German bond yield (DE10YT=TWEB: ) was 2.696
percent, up 8 basis points while the two-year Schatz yield
(DE2YT=TWEB: ) was 3 bps higher at 0.889 percent.

Above-forecast German retail sales figures — showing the
strongest growth in almost three years — also weighed on
safe-haven demand.

(Editing by Ruth Pitchford)

EURO GOVT-Peripheral pressure eases, weak demand for Bunds