LONDON, Dec 23 (Reuters) - Spanish and Italian bond yields rose on Monday amid speculation that banks in both countries may reduce their holdings before the European Central Bank reviews their balance sheets next year.
Uncertainty over how the ECB will view large holdings of sovereign bonds in its looming asset quality review has sparked some selling pressure from local banks in recent weeks.
That has triggered some opportunistic selling by foreign investors as well, traders said. Some market players said a few investors left it late to book profits on Spanish and Italian bonds, whose yields now trade at just over half the peak levels they hit during the debt crisis.
Spanish 10-year yields rose 8 basis points to 4.23 percent, while equivalent Italian yields rose 6.5 basis points to 4.19 percent. Most other euro zone bonds only saw their yields edging up by 1 or 2 bps. Spanish and Italian bonds yielded 234 bps and 231 bps over benchmark German Bunds, respectively.
"The main reason is speculation that domestic banks may reduce bond holdings before the ECB checks their balance sheet next year," said Felix Hermann, market strategist at DZ Bank.
Data showing Italy's consumer confidence index fell to 96.2 in December from a revised 98.2 in November, well below a median forecast of 98.8 in a Reuters survey, also weighed on peripheral bonds early in the session.
Thin volumes before the year-end holidays exacerbated the moves. Turnover in Italian BTP futures, which fell about half a point to 113.95, was about a third of the year-to-date daily average of 33,000 lots.
"We've seen some selling in illiquid markets. I'm surprised to see that people have left it so late to book their profits, although we've seen some selling by domestic banks as well, possibly related (to the ECB review)," one trader said.
"But people are generally positive on the periphery and many of them will be happy to see in the first few days of next year that yields have picked up."
Italy still plans to sell some debt by the end of the year, with an auction of 8 billion euros of Treasury bills and up to 3 billion euros of zero-coupon bonds scheduled for Friday.
German Bund yields hovered near their highest since mid-October hit last week after the Federal Reserve said it would scale back its bond-buying monetary stimulus in January as the U.S. economic outlook improved.
An upward revision to U.S. growth data on Friday raised expectations the withdrawal of stimulus would continue at a steady pace next year.
"You would expect to see some upward pressure on German yields if we were to continue to see surprises such as (the growth data) coming from the U.S.," Chris Clark, rates strategist at ICAP, said. Bund futures fell 17 ticks to 139.75. volumes totaled 137,000 lots, well below this year's daily average of nearly 682,000 lots. One lot represents 100,000 contracts.
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Uncertainty over how the ECB will view large holdings of sovereign bonds in its looming asset quality review has sparked some selling pressure from local banks in recent weeks.
That has triggered some opportunistic selling by foreign investors as well, traders said. Some market players said a few investors left it late to book profits on Spanish and Italian bonds, whose yields now trade at just over half the peak levels they hit during the debt crisis.
Spanish 10-year yields rose 8 basis points to 4.23 percent, while equivalent Italian yields rose 6.5 basis points to 4.19 percent. Most other euro zone bonds only saw their yields edging up by 1 or 2 bps. Spanish and Italian bonds yielded 234 bps and 231 bps over benchmark German Bunds, respectively.
"The main reason is speculation that domestic banks may reduce bond holdings before the ECB checks their balance sheet next year," said Felix Hermann, market strategist at DZ Bank.
Data showing Italy's consumer confidence index fell to 96.2 in December from a revised 98.2 in November, well below a median forecast of 98.8 in a Reuters survey, also weighed on peripheral bonds early in the session.
Thin volumes before the year-end holidays exacerbated the moves. Turnover in Italian BTP futures, which fell about half a point to 113.95, was about a third of the year-to-date daily average of 33,000 lots.
"We've seen some selling in illiquid markets. I'm surprised to see that people have left it so late to book their profits, although we've seen some selling by domestic banks as well, possibly related (to the ECB review)," one trader said.
"But people are generally positive on the periphery and many of them will be happy to see in the first few days of next year that yields have picked up."
Italy still plans to sell some debt by the end of the year, with an auction of 8 billion euros of Treasury bills and up to 3 billion euros of zero-coupon bonds scheduled for Friday.
German Bund yields hovered near their highest since mid-October hit last week after the Federal Reserve said it would scale back its bond-buying monetary stimulus in January as the U.S. economic outlook improved.
An upward revision to U.S. growth data on Friday raised expectations the withdrawal of stimulus would continue at a steady pace next year.
"You would expect to see some upward pressure on German yields if we were to continue to see surprises such as (the growth data) coming from the U.S.," Chris Clark, rates strategist at ICAP, said. Bund futures fell 17 ticks to 139.75. volumes totaled 137,000 lots, well below this year's daily average of nearly 682,000 lots. One lot represents 100,000 contracts.
yahoo.com
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