Spanish Debt Auction Meets Maximum Target as Demand Declines

Spain sold 4.49 billion euros ($6.2 billion) of debt, in line with its maximum target, and demand fell after European leaders raised the prospect of Greece leaving the euro region.

The Treasury in Madrid said it sold five-year benchmark bonds today at an average yield of 4.848 percent, compared with 4.489 percent last time they were sold on Sept. 1. It also sold debt due in 2014 at 4.27 percent, compared with 3.589 percent when notes of a similar maturity were sold last month.

Demand for the five-year was 1.62 times the amount sold, compared with 1.76 times when it was last auctioned on Sept. 1. The bid-to-cover for the 2014 bond was 1.66, compared with 1.78 times when similar-maturity securities were sold on Oct. 6. The Treasury aimed to sell a maximum of 4.5 billion euros.

The sale was Spain’s first since Greek Prime Minister George Papandreou shocked investors by calling a referendum on his nation’s bailout package. Spanish bond yields rose to the highest since Aug. 5 today after German Chancellor Angela Merkel described the referendum as a vote on Greece’s euro membership and Luxembourg’s Jean-Claude Juncker said euro governments want Greece to stay, but not “at all costs.”

“The decent auction will not be enough to substantially ease the selling pressure as European bond spreads remain driven by the Greece-related news flow,” said Michael Leister, a fixed-income strategist at WestLB AG in London. “Spanish banks are significantly reducing their holdings” of the nation’s debt, he said, adding that European Central Bank support “remains insufficient to stop the rise” in Spanish and Italian yields.

Yields Rise

Spain’s 10-year borrowing costs rose to 5.582 percent after the sale, the highest since the ECB started buying Spanish bonds on Aug. 8, from 5.463 percent yesterday. That pushed the spread over German equivalents to 374 basis points from 367 basis points. That compares with a euro-era high of 418 basis points on Aug. 5 and an average of 15 basis points in the first decade of monetary union.

Spain’s Socialist government is struggling to convince investors it will meet its deficit targets while trying to fight an election this month that polls indicate it will lose. The opposition People’s Party, which has pledged deeper austerity measures without specifying where it will ax spending, is set to win the largest majority any Spanish government has secured since 1982, a poll in El Mundo newspaper suggested yesterday.


“The auction was at the upper end of demand,” said Wilson Chin, a senior interest-rate strategist in London at HSBC Holdings Plc. “This is supportive of Spain given the circumstances.”

The Treasury said yesterday it has sold 81 percent of the gross bond issuance it forecast for the whole year and budget cuts “imply lower funding needs” than those set out in the borrowing plan in January. It faces redemptions equivalent to 12 percent of gross domestic product through October 2012, and the average life to maturity of its debt is more than six years, the agency said in a presentation on its website.

Still, Spanish banks are reducing their holdings of Spanish government bonds, Treasury data show. European leaders agreed at the Oct. 27 summit to apply a 3 percent reduction to the value of Spanish bonds held by banks, forcing them to bolster capital by 17 billion euros.

Spanish lenders have gross exposure to Spanish sovereign debt, including local governments, of 232 billion euros, according to data from the Bank of Spain. Data from the Treasury, which show only the debt issued by the central government, show Spanish lenders cut their holdings of Spanish public debt to 140.6 billion euros in August from 142.1 billion euros in July.

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