Spain Sells More Bills Than Scheduled as Yields Increase

Spain borrowing costs rose at a sale of one-year and 18-month bills for the first time since November as Prime Minister Mariano Rajoy battles to convince investors the country won’t need a bailout.

Spain sold 12-month bills at 2.623 percent, up from 1.418 percent at the last auction on March 20, the Bank of Spain said in Madrid today. The Treasury also sold 18-month bills at 3.11 percent, compared with 1.711 percent last month. The total amount sold was more than the 3 billion-euro ($3.9 billion) maximum target set for the auction.

Spanish bonds extended gains after the auction with the yield the 10-year benchmark bond falling 16 basis points to 5.91 percent. That yield rose as high as 6.156 percent yesterday, the most since Dec. 1. Spain faces another test of market sentiment on April 19 when it seeks to sell 2.5 billion euros of two-year bonds and its 10-year benchmark security.

“As far as this auction goes, not so bad but not good enough, in my opinion, to provide the market with a sense of optimism going into the bond auction on Thursday,” said Luca Jellinek, head of European interest-rate strategy at Credit Agricole Corporate & Investment Bank in London.

ECB Help

Demand for the 12-month bills was 2.9 times the amount sold, compared with 2.14 times last month. Demand for the longer maturity notes rose to 3.77 times from 2.93.

Demand for Spanish debt has been underpinned by the European Central Bank’s emergency three-year lending to banks at tenders in December and February. Spanish banks’ average net borrowings from the ECB surged almost 50 percent in March to 227.6 billion euros, central bank data showed last week, and data from the Treasury shows Spanish lenders piled up on the nation’s debt in the three months through February.

Spanish officials have called for additional help from the central bank, and Economy Minister Luis de Guindos is due to meet ECB President Mario Draghi in Frankfurt today. Industry Minister Jose Manuel Soria said today that a more “expansionary” policy to inject more liquidity would be “desirable,” after Jaime Garcia-Legaz, the deputy minister for trade, called on April 13 for the ECB to restart bond purchases.

Revised Target

The central government faces 11.9 billion euros of bond redemptions in April, 12.7 billion euros in July, and 20.2 billion euros in October, Treasury data show.

Spain’s 10-year borrowing costs have jumped more than one percentage point since Rajoy said on March 2 that the nation won’t meet a budget deficit target for this year of 4.4 percent of gross domestic product set by the previous administration and the European Union. Rajoy convinced euro-region peers to relax the goal to 5.3 percent as the euro area’s fourth-largest economy is forecast to contract 1.7 percent in 2012.

Rajoy has repeatedly said that the country won’t need a bailout and on April 13 said it was “not possible” for the EU to rescue Spain. Soria raised the threat of a bailout again today to justify the need for budget cuts.

ECB Divided

“If we don’t meet the deficit targets they will stop lending to us, and if no one lends to us, they will have to rescue us, and because the government rules out the possibility of a rescue and intervention, that’s why we’re doing reforms,” he said in an interview with RNE radio.

ECB officials are divided over the steps to tame the crisis and help Spain. While Executive Board member Benoit Coeure signaled on April 11 the bank may start buying Spanish bonds, his Dutch colleague Klaas Knot said on April 13 that the ECB is “very far” from reactivating a policy that failed to stop a selloff in Spanish bonds in November.

`Buy Time'

Spain needs more external financial help to “buy time” for its government to implement reforms, HSBC Holdings Plc’s Madhur Jha said in a radio interview on “Bloomberg Surveillance” with Ken Prewitt and Tom Keene yesterday.

“People are beginning to realize the more and more austerity you impose on an economy, the worse it becomes in terms of growth and also in terms of debt sustainability,” she said.

Rajoy yesterday said that there is no alternative to austerity. “Budget discipline and the rationalization of the public sector are good and necessary reforms,” Rajoy said during a conference in Madrid. “Furthermore, they’ll lead to a reduction in the spread between Spain’s borrowing costs and others’ and they will normalize access to funding.”

To contact the reporter on this story: Angeline Benoit in Madrid at abenoit4@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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