France-Spain Bond Sales Win Investor Backing After Central Bank Palliative
Spain sold 3.75 billion euros of notes and had to pay the most since at least 2005 to borrow for five years, with investors ordering more than twice the amount sold. France, rated AAA, auctioned 4.3 billion euros of debt and managed to sell a 10-year bond at 3.18 percent, less than at a previous auction on Nov. 3.
The debt sales were a test of investor confidence after the Federal Reserve, the European Central Bank and four other central banks in a globally coordinated effort yesterday cut the cost of emergency dollar funding for European banks. The central banks acted after financing costs rose following euro-area leaders’ failure to bolster the region’s rescue fund as planned.
“They were both pretty good auctions,” said Huw Worthington, fixed income strategist at Barclays Capital in London “The levels are higher than they would like, but the actual auctions were strong. The central bank action yesterday has certainly helped.”
Italy, with the second-largest public debt burden in the euro region after Greece, was forced to pay almost 8 percent to sell three-year debt on Nov. 29, the highest since 1996. The same day, Belgium paid the most in three years to sell six-month notes.
France sold bonds due in October 2017, October 2021, April 2026, and April 2041. Spain auctioned notes maturing in April 2015, January 2016 and January 2017.
Spain changed the securities it planned to sell at the auction, opting for longer-dated notes that already trade instead of a new benchmark three-year bond, citing market conditions. Spain’s short-term borrowing costs are approaching the levels of longer-term yields as the gap between two-year and 10-year rates narrowed last week to the least in three years.
The difference between yields for three-year and five-year notes narrowed to 10 basis points, or 0.10 percentage point, on Nov. 23, and was 44 basis points as of 10:30 a.m. London time. Greek and Portuguese short-term rates rose above long-term yields just before they sought bailouts.
Spain’s Treasury has already issued more than 16 billion euros each of the 2015 and 2016 bonds and more than 14 billion euros of the 2017 securities, according to data compiled by Bloomberg, making them more liquid than a new bond.
Spanish banks may also prop up the auction as Treasury data show they increased their holdings of the nation’s bonds to 142.4 billion euros in September, the highest on record, from 140.6 billion euros in August. Lenders are also increasing their dependence on the ECB, borrowing 76 billion euros in October, the most in more than a year, Bank of Spain data show.
“France and Spain both have big banks so that should help out at these auctions: typically what we hear is that they are refraining in the secondary market but they are still active in the primary market,” Kommer van Trigt, a fund manager at Robeco Groep NV in Rotterdam, said in a telephone interview.
France decided to press ahead with the sale of bonds today, braving the market turbulence, even though it has completed its funding requirements for 2011. The extra yield demanded to lend to France for 10 years rose to as much as 204 basis points more than the German rate on Nov. 17, the widest spread since 1990. The gap was 28 basis points in April.
Euro-area finance ministers said on Nov. 29 they would seek a greater role for the International Monetary Fund and ECB to top up efforts to bolster the region’s European Financial Stability Facility rescue fund.
They agreed on a plan to guarantee up to 30 percent of bond issues from troubled governments and to develop investment vehicles that would boost the facility’s ability to intervene in primary and secondary bond markets.
Spanish Finance Minister Elena Salgado, who’s set to be replaced on Dec. 22 when Prime Minister-elect Mariano Rajoy takes charge, said the measures will create a preventive firewall as there’s no “case on the table for it to be used.”
The ECB, which started buying Italian and Spanish debt in August, is resisting pressure to step up its response to the crisis. ECB President Mario Draghi told the European Parliament in Brussels today that the bond buying program was “limited” and said that euro-region governments unifying their fiscal policies would be a more effective way to end the debt crisis.
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