Spain Three-Year Borrowing Costs Rise as Rajoy Mulls Bailout

Spain’s three-year borrowing costs rose today at an auction focusing on the type of short-term notes that would be targeted by European Central-Bank debt buying should the nation apply for a second European bailout.

The Madrid-based Treasury sold 3.99 billion euros ($5.2) of bonds, including a three-year benchmark at an average yield of 3.956 percent, up from 3.845 percent the last time it was issued on Sept. 20. Securities maturing in October 2014 and July 2017 were priced to yield 3.282 percent and 4.766 percent respectively.

Demand rose to 1.98 times the amount sold for the 2015 bonds, compared with 1.56 times last month. The bid-to-cover ratio was 2.03 for the 2014 bonds and 2.47 for the 2017 bonds compared with 1.9 and 2.06 in July.

“Yields are somewhat superior to what was expected even though bid-to-cover ratios are positive,” Madrid-based Cortal Consors analysts wrote in an e-mailed statement after the sale.

Spanish bonds have pared losses since the ECB first offered to buy debt from cash-strapped nations on Aug. 2 on expectation of central bank support. The yield on Spain’s 10-year benchmark bond rose 6 basis points yesterday to 5.8 percent after Premier Mariano Rajoy denied a bailout request was imminent. That compares with a euro-era high of 7.75 percent on July 25 after Spain clinched an agreement for as much as 100 billion euros in European Union loans for its banks.

Photographer: Angel Navarrete/Bloomberg

A Spanish national flag flies above the Bank of Spain in Madrid. Close

A Spanish national flag flies above the Bank of Spain in Madrid.

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Photographer: Angel Navarrete/Bloomberg

A Spanish national flag flies above the Bank of Spain in Madrid.

Maturing Debt

The 10-year yield was at 5.85 percent after the auction while the spread with similar German maturities widened 4 basis points to 4.41 percent. The yield on the three-year benchmark was at 3.98 percent. The Treasury, which had covered 83.4 percent of its medium- and long-term debt issuance for 2012 by Sept. 25, returns to the markets on Oct. 16 to raise funds to cover 29 billion euros of maturing debt this month.

Economy Minister Luis de Guindos said yesterday that Spain will consider all the consequences of taking a bailout or not doing so, before making a decision on whether to trigger the rescue.

Rajoy, who championed the idea of EU bond buying, has been holding back from seeking the aid to avoid having to accept strict economic and budget conditions in return. His People’s Party faces two regional elections this month, in the northern states of Galicia and in the Basque country. That’s followed by a vote in Catalonia in November.

With signs that foreign investors shunning Spain, pressure on Rajoy is mounting. Non-residents cut their holdings of Spanish debt to 33 percent in August from 50 percent in December, data from the Treasury show.

Spanish banks raised their share to 34 percent from 17 percent with the help of ECB financing. Their net borrowings from the Frankfurt-based bank amounted to 389 billion euros in August, compared with 70 billion a year earlier, Bank of Spain data show.

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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