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Spain, France Take on Crisis With 8.1 Billion-Euro Debt Sale

Spain, France Sales Take on Crisis as Firewall Eludes EU
A European Union (EU) flag, left, and French national flag fly outside the Banque de France in Paris. France, rated AAA, is auctioning as much as 4.5 billion euros of debt as its 10-year securities yielded 112 basis points more than comparable German debt. Photographer: Antoine Antoniol/Bloomberg

Spain and France sold 8.1 billion euros ($10.9 billion) of bonds, sending yields lower across Europe, a day after six central banks jointly moved to reduce financing costs to banks.

Spain sold 3.75 billion euros of notes and had to pay the most since at least 2005 to borrow for five years, with investors ordering more than twice the amount sold. Top-rated France auctioned 4.3 billion euros of debt, including 10-year bonds at 3.18 percent, less than at the Nov. 3 sale.

The debt sales were a test of investor confidence after the Federal Reserve, the European Central Bank and four other central banks in a globally coordinated effort yesterday cut the cost of emergency dollar funding for European banks. The central banks acted after financing costs rose following euro-area leaders’ failure to bolster the region’s rescue fund as planned.

“They were both pretty good auctions,” said Huw Worthington, fixed-income strategist at Barclays Capital in London “The levels are higher than they would like, but the actual auctions were strong. The central bank action yesterday has certainly helped.”

French 10-year yields fell 27 basis points, the most in 20 years, to 3.12 percent after the auction, while Spanish 10-year bond yields declined 21 basis points to 6.015 percent. That compares with a euro-era high of 6.781 percent on Nov. 17, when Spain last auctioned bonds.


European leaders are due to meet on Dec. 9 and German Chancellor Angela Merkel said Nov. 29 that her priority is to put the “whole euro zone on a stronger treaty basis.” ECB President Mario Draghi told the European Parliament in Brussels today that the bank’s bond-buying program, which has included Spain and Italy since August, was “limited” and that euro-region governments unifying their fiscal policies would be a more effective way to end the crisis.

“We know that on Dec. 9 there are supposed to be some political developments from the euro zone but there’s a risk those developments could materialize earlier, so that may have created a bit of caution for those who are bearish on the periphery,” Peter Chatwell, a fixed-income strategist at Credit Agricole said. “It looks like shorts are being closed here.”

Spanish Cancelation

Italy, with the second-largest public debt burden in the euro region after Greece, paid almost 8 percent to sell three-year debt on Nov. 29, the highest since 1996. The same day, Belgium paid the most in three years to sell six-month notes.

France sold bonds due in October 2017, October 2021, April 2026, and April 2041. Spain auctioned notes maturing in April 2015, January 2016 and January 2017.

Spain changed the securities it planned to sell at the auction, opting for longer-dated notes that already trade instead of a new benchmark three-year bond, citing market conditions. Spain’s short-term borrowing costs started approaching the levels of longer-term yields last week as the gap between two-year and 10-year rates narrowed to the least in three years. Greek and Portuguese short-term rates rose above long-term yields just before they sought bailouts.

The difference between yields for three-year and five-year notes, which narrowed to 10 basis points on Nov. 23, widened to 42 basis points as of 11:00 a.m. London time today after the auction.

Big Banks

Spain’s Treasury has already issued more than 16 billion euros each of the 2015 and 2016 bonds and more than 14 billion euros of the 2017 securities, according to data compiled by Bloomberg, making them more liquid than a new bond.

Spanish banks increased their holdings of the nation’s bonds to 142.4 billion euros in September, the highest on record, from 140.6 billion euros in August, according to Tressury data. Lenders are also increasing their dependence on the ECB, borrowing 76 billion euros in October, the most in more than a year, Bank of Spain data show.

France decided to press ahead with the sale of bonds today, braving the market turbulence, even though it has completed its funding requirements for 2011. The extra yield demanded to lend to France for 10 years rather than Germany rose to 204 basis points on Nov. 17, the widest since 1990. It narrowed to 88 basis points today.

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