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Spanish Debt Demand Rises at Three-Year Note Sale; 10-Year Bond Advances

Spain sold 3.9 billion euros ($4.7 billion) of a new 2013 note, with demand increasing as yields driven higher by the region’s debt crisis lured buyers.

Investors bid to take up 2.1 times the amount of the securities on offer. That compared with a so-called bid-to-cover ratio of 1.8 when three-year notes were sold in April. The Treasury said it paid an average yield of 3.317 percent, compared with 2.007 percent at the April auction. The government had a maximum sales target of 4 billion euros.

Spanish Prime Minister Jose Luis Rodriguez Zapatero is facing down strikes and popular opposition to austerity measures such as public-wage cuts as he aims to slash the budget deficit in half by the end of next year. The extra yield investors demand to hold Spanish, Portuguese and Italian debt rather than benchmark German bunds fell today and the euro rose as concern that Europe is struggling to tackle its debt crisis eased.

“Risk appetite is coming back, there’s a more positive climate,” said Ciaran O’Hagan, a fixed-income strategist at Societe Generale SA in Paris. “There was strong demand.”

The bid-to-cover ratio compares with an average of 1.88 at bond auctions in the first five months of the year, according to the Finance Ministry. Spanish bonds rose after the auction, with the yield on Spain’s 10-year security falling 11 basis points to 4.52 percent as of 12:30 p.m. in Madrid.

The yield spread between the country’s 10-year bonds and German bunds climbed to a euro-era record of 208 basis points on June 8, erasing the drop triggered by the 750 billion-euro ($903 billion) European Union aid package.

Spread Narrows

That’s the most since 1996, according to generic data compiled by Bloomberg. It slid 68 basis points to 97 basis points on May 10 after the EU announced the rescue plan for its members with the highest deficits. It fell 9 basis points to 191 basis points today.

Spain’s parliament ratified a decree allowing the country to take part in the rescue mechanism, Speaker Jose Bono said today in Madrid.

“What we’re seeing across the board is that auctions are very far from being uncovered,” said Gianluca Salford, a fixed- income strategist at JPMorgan Chase & Co. in London. “But the price is higher yields.”

Portugal’s borrowing costs rose at an auction of 10-year debt yesterday. Belgian costs at a sale of 10-year debt on June 7 fell compared to an offering in February.

Budget Deficit

The Spanish government is seeking to reduce the budget deficit to within 3 percent of economic output in 2013 from last year’s 11.2 percent. While Spain’s public debt burden is lighter than that of Germany, France and the euro-area average, its private indebtedness is one of the highest in the region. The economy is forecast to contract for a second full year in 2010.

Fitch Ratings cut the country’s top credit rating one notch to AA+ on May 28, citing the risk of sluggish economic growth. While the government sees growth of 1.3 percent next year, accelerating to 2.7 percent in 2013, the International Monetary Fund forecasts more modest expansion of 0.9 percent in 2011 and 1.6 percent in 2013.

Spain faces bond redemptions of 16.2 billion euros in July.

To contact the reporter on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net

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