The results of a Spanish debt auction Thursday restored a little faith in the value of sovereign debt, with domestic banks clearly still interested in buying up. But many forex traders and top forex brokers have warned of the likelihood that the market will soon venture into more territory.

"Overall (the auction) was quite good, they sold the full amount, bid/cover was quite high, it sends the message that the Spanish banks can still support auctions," Lloyds rate strategist Achilleas Georgolopoulos said. "(But) Spanish spreads will remain under pressure ... There's nothing significant coming up that can help them. The only thing to improve the situation would be better data across Europe." Spain sold 2.5 billion euros of three- and five-year bonds to solid demand, but yields jumped even compared with previous auctions. The auction was particularly significant because it represented the first test for debt appetite since the country suffered a credit rating cut from S&P and figures suggested it was officially in recession.

Forex broker concern as Spanish rates hit top whack

Despite the domestic bank interest, the EUR/USD dipped on Thursday as yields jumped and began to raise concerns about the nation’s ability to maintain bank interest given its precarious economic situation. "The effect of the three-year LTROs (ECB's injections of about 1 trillion euros into the banking system) is losing steam and risks for Spanish spreads are elevated in the weeks ahead," said ING rate strategist Alessandro Giansanti.

The currency was also looking particularly vulnerable ahead of the impending ECB interest rate decision announced Thursday afternoon. But following the press conference, where Mario Draghi spoke positively of the shared currency, the EUR rallied against the dollar on reduced expectation of further QE. But the weight of Spanish instability going forward still weighs heavily on many analysts: “The Spanish bond market remains extremely vulnerable and the stresses facing the Spanish government seem unlikely to disappear soon," said Jane Foley (pictured), currency analyst at Rabobank. "With the ECB policy meeting there's some speculation there could be a more dovish tone, but it's very debatable how the euro should react. Dovish is generally associated with a weaker currency ... but it might support investor confidence."

Hollande helps French yields dip

Elsewhere in the euro zone, French yields dipped slightly lower with sentiment suggesting that the markets were warming to the prospect of Francois Hollande and his potentially less disciplined approach to fiscal policy. Overall, the auctions topped forex broker expectation, with Hollande’s willingness to renegotiate providing motive for investors.

French 10-year yields were 6 bps lower after the auction, at 2.909 percent.  Meanwhile, ten-year-bond yields dropped four basis points to 2.93 percent. Investors bought French benchmark bonds at an average yield of 2.96 percent at today’s auction, compared with 2.98 percent on April 5, debt-agency data showed. The nation also sold securities due in October 2017, October 2021 and October 2025.

"It looks like some of the uncertainty related to the presidential election hasn't weighed too much, they managed to get the full amount away with lower yields and decent bid/cover," WestLB fixed income strategist John Davies said. "There's a realisation that pure austerity alone may not work. The conflict that the market had perceived to happen if Hollande came to power may not be as insurmountable as first thought."

Sarah Cox, Staff Writer