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Spanish Bonds Slump on Auction as ECB Loans Boost Fades

The Spanish National Flag
Spanish notes led losses in European sovereign debt markets after demand fell and borrowing costs rose in the nation’s first auctions since announcing that public debt will surge to a record this year. Photographer: Denis Doyle/Bloomberg

Spanish notes led losses in European sovereign debt markets after demand fell and borrowing costs rose in the nation’s first auctions since announcing that public debt will surge to a record this year.

The yield on Spain’s five-year securities climbed to the highest in 12 weeks amid concern the boost from loans provided under the European Central Bank’s longer-term refinancing operations is waning. Italian, Portuguese and Greek bonds also fell, underperforming benchmark German bunds. The ECB held its main refinancing rate at 1 percent, and President Mario Draghi said downside risks to the economic outlook prevail, including the potential for renewed debt-market tension.

“There was a big pop in Spanish yields after the auction results,” said Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London. “There’s a concern that the benefit to auctions and Spanish yields from the LTROs is beginning to fade because of the consistently weak economic picture. Some banks may be full up with what they want to buy.”

Spain’s five-year note yield climbed 26 basis points, or 0.26 percentage point, to 4.52 percent at 4:30 p.m. London time. It reached 4.55 percent, the highest since Jan. 10. The 4.25 percent security due October 2016 fell 1.055, or 10.55 euros per 1,000-euro ($1,313) face amount, to 98.88.

Credit-default swaps insuring Spanish bonds jumped 18 basis points to 460 basis points, the highest since Nov. 28. The euro fell 0.8 percent to $1.3125.

Spanish Auction

Spain sold a total of 2.59 billion euros of bonds, compared with a maximum target of 3.5 billion euros.

Yields on the five-year notes it sold rose to an average 4.32 percent from 3.38 percent in a sale on March 1. Investors bid for 2.46 times the amount of debt allotted, compared with a bid-to-cover ratio of 2.59 at the previous auction.

Volatility in Spanish government debt was the highest in euro-area markets today, followed by Italy, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps.

Italy’s five-year note yield climbed 21 basis points to 4.55 percent. Greek bonds due in February 2023 fell, with the yield jumping 66 basis points to 21.95 percent. Germany’s 10-year bund yield was little changed at 1.80 percent, after earlier rising to as high as 1.87 percent.

‘Extreme Difficulty’

Today’s Spanish sale was 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.

Prime Minister Mariano Rajoy told a party meeting in Malaga, Spain today that the nation’s economic situation is one of “extreme difficulty,” with some public institutions locked out of capital markets, preventing them from refinancing their debt. Spain can recover if it takes the right measures, Rajoy said.

The nation’s 10-year yield dropped in December and January, reaching a 16-month low of 4.83 percent on March 1, as the ECB offered unlimited three-year loans to the region’s financial institutions.

“Now that LTRO-driven demand is gone, markets have been looking for any signs of reduced appetite setting in for Spanish and Italian debt,” said Brian Barry, a strategist at Investec Bank Plc in London. “There is a concern that this may be a potential indicator of funding fatigue setting in.”

‘Structural Reforms’

Markets are demanding euro-region governments deliver structural reforms and fiscal consolidation, Draghi said at a press conference in Frankfurt.

“Fiscal consolidation will eventually stabilize financial conditions,” he said. “That’s why we said all along that structural reforms are essential to produce long-term sustainable growth.”

The ECB’s decision to leave its key interest rate unchanged today was in line with the forecast of all 57 economists in a Bloomberg News survey. Talk of an “exit strategy” for the bank’s stimulus measures is premature, Draghi said.

The 10-year Spanish rate rose the most since Jan. 20, climbing 25 basis points to 5.7 percent after increasing as much as 26 basis points to 5.71 percent. The extra yield investors demand to hold the securities instead of bunds jumped to as high as 393 basis points, the widest since Dec. 12.

Draghi’s comments signal “his concerns that we may see a resurgence of weakness in peripheral markets, a concern shared with many in the market and heightened given recent performance of Spanish debt,” Investec Bank’s Barry said. Only when “sustained confidence returns to these funding markets are we likely to see the desire for safe-haven assets recede, and bund yields rise,” he said.

German Auction

Germany sold 3.37 billion euros of notes due February 2017 at an average yield of 0.80 percent. Investors bid for 1.8 times the amount of securities allotted. A previous auction of the same securities held March 7 also garnered a bid-to-cover of 1.8 times and an average yield of 0.79 percent.

The nation’s five-year rate fell two basis points to 0.79 percent, with the two-year yield slipping one basis point to 0.19 percent.

The German two-year yield is consolidating below its 100-day moving average at 0.242 percent, according to data compiled by Bloomberg. It may find support at the March 13 rate of 0.19 percent, with resistance at the February high of 0.289 percent.

A resistance level is an area on a chart where analysts anticipate orders to sell a currency to be grouped and a support level is an area where they anticipate buy orders to be clustered.

Portuguese 10-year bonds fell for a fifth day, pushing the yield 22 basis points higher to 12.06 percent.

Portugal’s government debt agency sold 1 billion euros of 18-month bills due in October 2013 at a yield of 4.54 percent. Investors bid for 2.6 times the amount of debt allotted.

German bunds have returned 0.2 percent in 2012, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish debt gained 0.5 percent, while Portuguese bonds rose 12 percent, the best performance of the 26 sovereign markets tracked by the gauges.

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