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Spain Smoothes Debt ‘Profile’ With 15-Year Bonds: Euro Credit

Spain's Prime Minister Jose Luis Rodriguez Zapatero
Spain's Prime Minister Jose Luis Rodriguez Zapatero, facing a decline in popular support and opposition from unions, has cut public workers’ wages, increased value-added tax, and frozen pensions for next year in a bid to stem borrowing costs. Photographer: Andrew Harrer/Bloomberg

Spain, the country with the euro region’s highest unemployment, plans to sell 15-year debt this week, taking advantage of a rebound in the euro-region bond market to reduce pressure on its short-term borrowing needs.

The Iberian nation will auction bonds that mature in July 2025 for the fourth time this year, and also will sell securities on Oct. 21 that are due in July 2032. The extra yield that investors demand to hold 10-year Spanish debt rather than benchmark German bunds declined to 159 basis points as of 12:36 p.m. in London, the lowest in more than two months.

Spanish bonds have added to the biggest quarterly gain since the end of 2008 even as a jobless rate above 20 percent crimps economic growth. The government is extending the maturities of its debt after relying on shorter-dated securities to raise funds as pessimism about a possible default roiled the so-called euro peripherals.

“You do want your maturity profile to be longer, but you don’t want to be paying over the odds for it,” said Johan Jooste, a strategist at Bank of America Corp.’s Merrill Lynch Global Wealth Management in London, which oversees about $1.4 trillion for clients. “Prudence suggests getting a smoother profile is better and I think at the margin they can lengthen out the maturity without getting punished by the market.”

Spanish, Portuguese and Greek 10-year bonds rose relative to German bunds last week as the nations’ financial institutions reduced their reliance on funding from the European Central Bank, indicating the sovereign debt crisis is easing. Yields on 10-year Greek bonds remain the highest in the euro region, at 8.93 percent, 655 basis points more than German bunds.

Greece to France

Greece, Portugal, the Netherlands and Spain are selling short-dated debt this week, while France will offer bills, notes and index-linked bonds. Greece isn’t currently issuing bonds as it receives financial support from the European Union and International Monetary Fund, while Ireland has suspended sales until the end of the year.

“They can’t indefinitely refinance debt with six-month and one-year sales,” said Vincent Treulet, chief strategist at Paris-based BNP Paribas Investment Partners, which oversees 533 billion euros ($740 billion).

The extra yield investors demand to hold 10-year Spanish bonds reached 221 basis points over bunds on June 16, a euro-era record, on concern it would struggle to refinance 25 billion euros of bills and bonds due in July. After passing that hurdle, the yield spread narrowed.

Maturing Bonds

“You don’t want this maturity wall hitting the market every six months,” Jooste said. “Under normal circumstances that comes and goes without anyone taking notice, but when you’re under the microscope it’s a different matter.”

The proportion of shorter-dated bills as a percentage of overall Spanish debt will increase to almost 18 percent by the end of this year from about 11 percent in 2007, Chiara Cremonesi a strategist at UniCredit SpA in London, wrote in a report to customers last week. The use of two- and three-year notes rose to 26 percent this year from 12 percent in 2007.

Spain has almost 117 billion euros of bonds and loans coming due in 2011, compared with 36 billion euros in Greece and 24 billion euros in Portugal, data compiled by Bloomberg show. Spain’s gross domestic product is more than quadruple the size of Greece and six times larger than Portugal’s economy.

“The heavy reliance on short-term funding has had an impact on Spain refinancing risk,” Cremonesi wrote in the Oct. 13 note. “The good news in this respect is that Spain should start lengthening its debt maturity already next year, according to the debt agency, and likely some improvement should already be evident this year.”

‘Average Life’

In a presentation on the website of Spain’s debt agency that was updated Oct. 8, a slide says that “lengthening the average life of debt outstanding remains an objective.”

Spanish bonds returned 4.1 percent in the third quarter and handed investors a 1.1 percent gain this month, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Debt maturing in 10 years or more gained 1.6 percent this month, compared with a 0.55 percent increase for notes due in one to three years, the indexes show. German bonds were little changed for the month.

Spain is battling to slash the third-largest budget deficit in the euro region without strangling the recovery. Prime Minister Jose Luis Rodriguez Zapatero, facing a decline in popular support and opposition from unions, has cut public workers’ wages, increased value-added tax, and frozen pensions for next year in a bid to stem borrowing costs.

Avoiding Peripherals

The government has forecast that GDP will decline 0.3 percent in 2010. Spain’s unemployment rate, at 20.5 percent in August, remains the highest in Europe.

“We’ve got through the big funding humps this year, but we haven’t seen the end of volatility in peripheral Europe,” said Tom Sartain, a fund manager at London-based Schroders Plc, which doesn’t own Spanish, Greek, Irish or Portuguese securities among its government bond holdings. “These countries face a mammoth task implementing their austerity programs while still generating GDP growth. We need to see this can be done before we’d be convinced to invest.”

Credit-default swaps insuring Spain’s government debt cost 196 basis points on Oct. 15, while insurance on German debt was 32 basis points and 681 basis points for Greece, according to data provider CMA.

Spain plans to sell 192 billion euros of bills and bonds next year, according to budget documents presented to the nation’s parliament on Sept. 30. The nation’s debt was 53 percent of GDP in 2009, compared with 64 percent in Ireland, 115 percent in Greece, 77 percent in Portugal and 116 percent in Italy, according to EU data.

Spain’s IBEX 35 Index of equities has dropped 9.5 percent this year, compared with a 4.8 percent gain for the Stoxx Europe 600 Index of shares.

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