10:06 AM » Italian, Spanish Bonds Rally Before 3-yr ECB Tender
Italian and Spanish bond yields fell on Tuesday, with investors hoping banks will borrow a large amount of three-year funds from the European Central Bank later this week and spend some of the money on peripheral debt. A sharp fall in one-week borrowing from the ECB and a large one-day loan take-up on Tuesday supported the view, as the figures reflected banks were managing their cash to better position for Wednesday's three-year injection. Volumes in bond markets were thin, however, with many reluctant to join the rally on the view that banks, under pressure to deleverage, will use the money to roll over their own debt rather then buy bonds that could eventually generate mark-to-market losses. Demand from banks at the three-year tender is expected to be around 250 billion euros, according to a Reuters poll, although forecasts ranged from 50 to 450 billion, indicating a high degree of uncertainty. "The expectations are massive," one trader said. "A higher take-up is going to give the periphery some support, but we're possibly setting ourselves up for a fall. It's not guaranteed that they're going to buy (peripheral bonds)."