Looming debt repayments support Spanish and Italian bonds
By Marius Zaharia
LONDON, July 25 (Reuters) - Spanish and Italian yields held near record lows on Friday, as next week's bumper 60 billion euros worth of debt and coupon repayments from the two countries were expected to be reinvested in the market.
Investors' anticipation of the new cash to spend had allowed Spanish and Italian debt to outperform their euro zone peers on Thursday even as surveys showing better growth prospects were seen as lowering chances of further European Central Bank easing.
Germany's Ifo business survey, if it also beats forecasts, may further dent any expectations the ECB could eventually print money via an asset purchase programme known as quantitative easing, or QE.
Spanish and Italian debt "should sell off on good data, because some expectations of QE are still in the price," one trader said. "But we've got huge coupon and debt repayments next week and we're in an environment where people are scrambling for any yield they can get."
Spanish and Italian 10-year yields dipped 1 basis point to 2.56 percent and 2.73 percent, respectively, in line with most other euro zone bonds. Those levels were just off record lows.
They held their own on Thursday, when yields on German and other top-rated bonds rose some 3 bps after better-than-expected manufacturing and services surveys in the euro zone and strong jobs data in the United States.
Markets will also watch data on bank repayments of long-term loans to the ECB later on Friday. Banks repaid 21 billion euros this week, one of the largest figures on record.
The repayments lead to lower excess liquidity in the banking system, putting upward pressure on money market rates which could eventually trickle through short-term bond yields as well.
Some analysts expect some of the banks to use the money they receive from the Spanish and Italian debt repayments to give back some of the three-year loans they took from the ECB in 2011 and 2012 at the height of the crisis.
The other factor leading to higher returns of ECB loans is the 10 basis points charge on banks holding excess cash with the central bank overnight, which was introduced in June.
"Due to the huge ... redemptions of Spanish and Italian government bonds next week, another high number looks likely today, which would put some upward pressure on the short end of the curve," said Jan von Gerich, chief fixed income analyst at Nordea.
(Reporting by Marius Zaharia; Editing by Hugh Lawson)
