* Spanish yields mostly recover early post-downgrade losses
* Losses tempered by unwillingness to go short while ECB
waits
* Italy bond auction finds solid demand but yields higher
By William James
LONDON, Oct 11 (Reuters) - Spanish debt recovered from an
early selloff on Thursday caused by an overnight downgrade as
most market participants opted to wait for deeper credit rating
cuts before abandoning their investments in the country.
Standard and Poor's cut Spain's rating to BBB-minus with a
negative outlook, just one notch above junk grade and in line
with peer Moody's, which is expected to conclude its own review
of the country's rating soon.
The S&P move raises the likelihood that Spain could be rated
below investment grade by two agencies in the near future, which
would cause it to drop out of some major bond indices and force
selling by investors who track such benchmarks.
But with most already pricing a downgrade to junk into
Spanish bonds, and pending the Moody's verdict, which had been
expected in late September, the reaction in financial markets
was fleeting.
Spanish 10-year yields were 1 basis point
higher on the day at 5.84 percent, having earlier risen as high
as 5.96 percent. Two- and five-year bond yields were still
around 5 bps higher, but within their recent ranges.
"I think the overall sentiment hasn't changed ... basically
people expected this (downgrade) anyway and the focus is on the
bailout," a trader said.
German Bund futures were last 24 ticks higher on
the day at 141.47, having risen as high as 141.90 shortly after
the market opened.
Spanish 10-year yields remain well below the high of 7.8
percent they hit in July, kept in check by the European Central
Bank's commitment to buy the country's debt if Madrid seeks aid
from its euro zone peers as widely expected.
Despite growing impatience over Spain's perceived slow
progress towards making a bailout request, market pressure has
so far been modest because few want to be caught betting on
rising yields if the ECB starts buying debt.
"Bad news for Spain might be seen as just pushing them
closer to a bailout request. It is difficult to short (or)
underweight the bonds when you know the ECB is standing on the
sidelines," said Gary Jenkins, director at Swordfish Research.
ITALY AUCTION
Fellow euro zone struggler Italy sold 6 billion euros of
bonds at auction, paying a higher price to sell three-year debt
than a month ago but still finding solid demand.
"Yields were a bit higher but not particularly elevated so
all in all it went pretty smoothly," said Nick Stamenkovic,
strategist at RIA Capital Markets in Edinburgh.
"I think it's the expectation that the ECB continues to
provide a backstop for not just Spain, but Italy as well,
further down the road."
Italian 10-year yields were down 2 bps on the
day at 5.9 percent while two-year yields fell by
the same amount to 2.54 percent - 81 bps below their Spanish
equivalent.
