Spain, Italy debt extends rally but ECB details key

Mon Aug 6, 2012 12:29pm EDT
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By Emelia Sithole-Matarise and Ana Nicolaci da Costa

LONDON (Reuters) - Spanish and Italian bonds rose further on Monday, led by shorter-dated paper which has met revived demand on prospects of eventual ECB buying but details of the promised anti-crisis steps were seen key for more gains.

Two-year Spanish yields have more than halved from euro-era peaks above 7 percent hit on July 25 to 3.42 percent since ECB President Mario Draghi said on Thursday bond purchases under new measures being hammered out would target shorter-dated debt.

The gap between two- and 10-year Spanish yields hit its widest in the euro era at 338 basis points and that differential could widen to 400 bps in coming weeks, according to RBS rate strategist Harvinder Sian.

"Two-year Spain (yields) can get down to 2 percent...The rally can go on for a couple of weeks but we need to see some details from the ECB in terms of what exactly they are planning. That will be the key," Sian said. "Particularly we're waiting to see the maturities they are willing to buy."

Spanish 10-year yields fell 14 bps to 6.8 percent, retreating further from euro-era highs of 7.78 percent hit early last week, with equivalent Italian yields 6 bps lower at 6.0 percent. Two-year paper yielded 3.11 percent, down more than 20 bps on the day.

Strategists and traders said steepeners - bets that short-dated bond prices would rise faster than long-dated ones - were the position to take on Spanish and Italian debt.

"We like 2-5s, 2-10s steepeners because they can perform I think very well both in a bullish and a bearish market," BNP Paribas strategist Matteo Regesta said.

Sentiment in Spanish and Italian debt markets - at the forefront of the three-year debt crisis - has improved as investor conviction has grown that the ECB will eventually intervene to lower the two countries' borrowing costs provided Madrid and Rome request help from the bloc's bailout funds.   Continued...