Spain Sells 2.5 Billion Euros of Short-Term Bills as Borrowing Costs Surge

Spain sold 2.5 billion euros ($3.4 billion) of Treasury bills, below the maximum target for the auction, as contagion from Ireland’s bailout prompted a surge in the country’s borrowing costs.

The Treasury sold 1.99 billion euros of 12-month bills and 523 million euros of 18-month bills, the Bank of Spain in Madrid said today. The average yield on the 12-month bills was 3.449 percent, compared with 2.363 percent when similar-maturity securities were sold on Nov. 16, and the 18-month paper yielded 3.721 percent, up from 2.664 percent in November. The Treasury set a maximum target of 3 billion euros for the auction.

The gap between Spanish and German bond yields surged on Nov. 30 to the widest since the start of the euro amid speculation Spain may follow Ireland into a European Union bailout. Faced with higher debt costs, Finance Minister Elena Salgado said on Nov. 26 the Treasury will issue less debt than planned at the last auctions set for the year, including bond sales on Dec. 16, as the state has met its 2010 financing needs.

“The big story is going to be Thursday,” said Gianluca Salford, a fixed-income strategist at JP Morgan in London. “All the other peripheral countries have been out of the market for December, liquidity is poor, final demand is poor, so technically the situation for Spain is bad,” even as falling prices may mean the bonds perform better after the next sale.

Bond Purchases

Spanish bonds continued to decline on the secondary market after the sale, with the 10-year bond yield rising to 5.53 percent. The spread widened to 256.2 basis points, compared with 247.7 basis points yesterday and an average of 15 basis points for the first decade of monetary union. The gap reached a euro- era intraday record of 298 basis points on Nov. 30. The euro strengthened 0.3 percent to $1.3436.

The European Central Bank increased its bond purchases last week as part of its package of measures aimed at easing the sovereign debt crisis. The Frankfurt-based ECB said it completed 2.667 billion euros of purchases, the most in 23 weeks, after settling 1.965 billion euros the previous week. The bank hasn’t said which countries’ securities it is buying.

As the sovereign-debt crisis spreads from Ireland to Spain, Portugal and Italy, European leaders meet in Brussels on Dec. 16 and Dec. 17. On the agenda are discussions about the creation of a permanent rescue mechanism to replace the existing bailout fund that expires in 2013.

Spain has repeatedly said it doesn’t need external help and is making banks and regional governments provide investors with additional data in an attempt to disprove suspicions about the country’s fiscal and financial health.

Banks will start publishing additional information about their real-estate exposure and wholesale funding next year. This is necessary as “the perception of reality is much worse than reality itself,” Bank of Spain Governor Miguel Angel Fernandez Ordonez said yesterday.

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

To contact the editor responsible for this story: John Fraher at jfraher@bloomberg.net

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