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Spain to Test Investor Appetite for Longer Debt as Yields Fall

Spain is selling debt in a test of investor sentiment that has seen demand rise and borrowing costs fall so far this year.

The Spanish Treasury plans to sell as much as 4.5 billion euros ($5.8 billion) of notes and bonds maturing in 2016, 2019 and 2022 today after exceeding its maximum targets in bond auctions since Dec. 13. The euro region’s fourth-largest economy halved its borrowing costs at a bill auction two days ago when compared with the previous sale of similar-maturity debt.

Strong demand in Spain’s last auctions may have been due to the European Central Bank having pumped 489 billion euros of three-year money into the financial system on Dec. 21, said Riccardo Barbieri, London-based chief European economist at Mizuho International Plc. The nation will have raised 16 percent of its gross funding needs for the year if its meets its maximum target today, compared with 9 percent at the same time in 2011, according to Credit Agricole Corporate & Investment Bank.

“Spain is in safer waters, courtesy of ECB,” Barbieri wrote in a research note last week. “The Tesoro must have decided that it made sense to front-load issuance for 2012 given that the largest domestic banks had room to expand their balance sheets.”

ECB Support

Spanish 10-year yields were at 5.15 percent yesterday, down from a 14-year high of 6.78 percent on Nov. 17. Two-year yields were at 3.04 percent after reaching a 14-month low of 2.80 percent on Jan. 13.

The ECB’s three-year loans may not alone be enough to support demand for today’s auction of seven and 10-year securities, according to Richard McGuire, a senior fixed-income strategist at Rabobank International in London.

“A successful outcome is not assured,” he said in an e-mailed report the day before yesterday.

The central bank stepped in to support the Spanish bond market on Jan. 16, according to three people with knowledge of the transactions who declined to be identified because the deals were confidential. The ECB and domestic Italian and Spanish investors may need to buy as much as 121 billion euros of debt this year as international investors don’t roll over their holdings and shun new supply, Barclays Plc yesterday said.

“Thursday’s auction of longer-dated paper will provide a more accurate gauge of underlying sentiment towards Spain,”. Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, said by e-mail. “Like in Italy, the real test for the Spanish treasury is at the longer end of the curve.”

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