Spain Borrowing Cost Rises as Demand Drops at Bond Sale

Spain's Budget Minister Cristobal Montoro
The auction is the first since Budget Minister Cristobal Montoro presented this year’s budget and said public debt will rise to 79.8 percent of gross domestic product as the government makes the deepest budget cuts in three decades. Photographer: Denis Doyle/Bloomberg

Spain sold 2.6 billion euros ($3.4 billion) of bonds, near the minimum planned, and borrowing costs rose as the impact of European Central Bank’s emergency lending waned. Bonds and the euro declined.

The Treasury auctioned bonds maturing in January 2015 at an average 2.89 percent, up from 2.44 percent on March 15, while bonds due in October 2016 yielded 4.319 percent, up from 3.376 percent on March 1. Securities maturing October 2020 were sold at 5.338 percent, Madrid-based Bank of Spain said today. The Treasury had set a range of 2.5 billion euros to 3.5 billion.

Spain’s financing costs had been held down by the ECB’s 1 trillion euros of three-year loans to banks, known as the LTRO, some of which have been recycled into high-yielding government debt. Yields had declined as much as 95 basis points after ECB President Mario Draghi announced the policy on Dec. 8 and Spanish banks’ holdings of government debt jumped to 220 billion euros in January from 178 billion euros in November.

“It’s back to reality now, the auction shows the LTRO effect has been exhausted and now demand for Spanish paper is becoming much more price sensitive,” Peter Chatwell, a London-based fixed-income strategist at Credit Agricole Investment Bank, said in a telephone interview.

Bonds Decline

The yield on the October 2016 bond, which acts as the five-year benchmark, rose to 4.48 percent from 4.26 percent yesterday and the gap between Spanish 10-year borrowing costs and German equivalents widened to 386 basis points, the most since December. The euro weakened after the sale, losing 0.8 percent to trade at $1.3132.

The Spanish Treasury has covered 47 percent of the bond issuance it plans for 2012, the Economy Ministry said in an e-mailed statement today. “The Treasury has enough liquidity and doesn’t need to force the market,” it said.

Spain’s 10-year benchmark bond yield rose to 5.64 percent, from 5.45 percent yesterday. That compares with 4.87 percent on March 1, before Prime Minister Mariano Rajoy announced Spain would miss its deficit target for a second year in 2012.

“Today’s auction almost certainly presages a turning of the tide for Spain,” Nicholas Spiro, managing director of Spiro Sovereign Strategy, said in an e-mail. “That the level of issuance was low to begin with makes the result all the more disappointing.”

Record Debt

Demand for the 2015 debt was 2.41 times the amount sold, compared with 4.96 in March. The bid-to-cover ratio for the 2016 bonds was 2.46 times, compared with 2.59 times on March 1, and 2.96 times for the 2020 bonds, which hadn’t been auctioned since September.

The sale is the first since Budget Minister Cristobal Montoro presented the government’s 2012 spending plan on March 30 and said public debt will rise to 79.8 percent of gross domestic product, the highest since at least 1980, even as the government makes the deepest budget cuts in three decades.

That leaves the gap between Spain’s debt load and the European Commission’s projected average for the euro area at 10.6 percentage points, compared with 30.1 points in 2007 when Spain began using budget surpluses to reduce borrowing. In its forecast in November, the commission put Spain’s debt burden at 73.8 percent of GDP this year.

The Treasury will favor medium-term securities over 15-year and 30-year bonds this year as it seeks to sell 36.8 billion euros of net debt, or 186.1 billion euros in gross terms. That will reduce the average maturity of outstanding debt to between 6.2 and 6.4 years, according to a spending plan sent to Parliament yesterday.

Spain plans to make almost 29 billion euros of interest payments in 2012, up from 22 billion euros a year earlier. That’s equivalent to about 2.7 percent of GDP and is about the same amount as the budget cuts announced last week to reorder public finances.

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