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Spanish Notes Decline After Demand at Debt Auction Weakens

Spanish two-year notes fell after demand at a Treasury auction weakened and investors awaited details of the European Central Bank’s proposal to buy the country’s bonds.

The Treasury today sold 3.5 billion euros ($4.4 billion) of bonds, meeting its maximum target, even as demand for notes maturing in 2014 fell to 2.01 times the amount sold from 3.97 at an auction in June. Two-year benchmark yields, which had fallen to as low as 2.99 percent before the auction, rose to 3.17 percent at 1 p.m. in Madrid.

While the auction was “pleasing from the perspective of the Tesoro having met the top end of its target range,” that positive news is “diluted by the comparative softness of demand,” Richard McGuire, a senior fixed-income strategist at Rabobank in London, said in an e-mailed comment.

Rajoy, who hosts German Chancellor Angela Merkel in Madrid today to discuss the euro-area crisis, has said he may ask the ECB to buy the country’s bonds once he has more details on the proposal. ECB President Mario Draghi will speak to reporters at 2:30 p.m. today in Frankfurt after a rate-setting meeting.

At the auction, demand for the 2016 notes was 1.86 times the amount sold, compared with 2.72 times at a sale in August and the bid-to-cover ratio for the 2015 bonds was 1.76, down from 2.28 in July.

Still, expectations of ECB buying pushed down yields. The average rate on debt maturing in 2016 fell to 4.603 percent from 5.971 percent on Aug. 2, while the yield on notes due in 2015 declined to 3.676 percent from 5.086 percent in July. Securities due in 2014 were sold at 2.798 percent, compared with 4.706 percent in June.

On Sept. 1, Rajoy said Spain is unable to fund itself at current borrowing costs. The prime minister needs to find a solution quickly. Of Spain’s 688.6 billion euros of bonds and bills outstanding, 335.8 billion euros -- almost half of the total debt -- comes due in the next three years, according to data compiled by Bloomberg.

The yield on Spain’s benchmark 10-year bond yield fell 19 basis points from yesterday to 6.22 percent, down from a euro- era intraday record of 7.75 percent on July 25. Rajoy and Merkel are expected to talk to reporters after meeting at 1 p.m. in Madrid.

The Treasury, which returns to the market on Sept. 18., said after the auction today it has covered 76.8 percent of the planned medium- and long-term issuance planned for this year. That puts the debt agency in a “comfortable” position for the rest of the year, it said in a statement today.

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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