Spanish Yields Rise at Auction as Greece Fuels Contagion

Spain Sells 2.9 Billion Euros of Bills as Funding Costs Rise
Spanish banks borrowed a record 264 billion euros from the European Central Bank in April, Bank of Spain data showed today. Photographer: Angel Navarrete/Bloomberg

Spain’s borrowing costs rose at a bill auction and an Italian debt sale failed to assuage concern that the escalation of the Greek crisis risks overwhelming its Mediterranean neighbors.

Spain sold 2.9 billion euros ($3.7 billion) of bills, just below its maximum target, and offered the most since December to lure investors as demand eased. Italy auctioned 5.25 billion euros of debt, including its first bond of more than 10 years in seven months, as the Treasury reached the maximum set for the sale amid stronger demand.

Spanish bond yields rose to the most since December after Prime Minister Mariano Rajoy’s government said it may inject public funds into struggling lenders and data showed banks’ borrowings from the European Central Bank surged to a record 264 billion euros. As Greece entered a second week of political deadlock, expectations grew that the country may leave the euro, adding to the risk of contagion for Italy and Spain.

“It’s turning into a perfect storm: a loss of confidence in the Rajoy government’s ability to stop the rot and, perhaps more worryingly, renewed fears of a disorderly Greek exit from the euro zone,” said Nicholas Spiro, managing director of Spiro Sovereign Strategy. “Differentiation between Italy and Spain is becoming less pronounced as the Greek crisis escalates.”

AAA Auctions

Spanish 10-year bond yields rose to 6.29 percent after the auction from 6.219 percent before the sale, an increase of 33 basis points from the previous close on May 11. Italy’s 10-year yield jumped 28 basis points to 5.75 percent, the highest since Feb. 16 even with demand rising at the bond sale.

Investors asked for 1.52 times the amount of three-year bonds on offer today, up from 1.43 times last month. The bid to cover on the Italian 10-year bond sold today was 2.27 times, while investors asked for 1.93 times the 2025 bond, the first time the Treasury sold the bond since October.

Spain sold 12-month bills at an average rate of 2.985 percent, compared with 2.623 percent on April 17, the Madrid-based Bank of Spain said. By contrast, AAA-rated Germany sold 3.3 billion euros of six-month bills at a rate of 0.0371 percent and Finland, which also has the top rating that Spain lost in 2009, sold five-year bonds at 0.872 percent. France auctioned 7.26 billion euros of 13-week and 50-week bills, paying 0.185 percent to borrow for almost one year.

Spanish Banks

Shares in Spanish banks tumbled today after the government demanded an additional 30 billion euros of provisioning on real estate lending on May 11 and estimated it would have to inject less than 15 billion euros into struggling lenders. Spanish banks have been the main buyers of government debt this year, more than doubling their holdings in the four months through March, according to Treasury data.

Those lenders borrowed a record 264 billion euros from the European Central Bank in April, Bank of Spain data showed today. The amount compares with 228 billion euros in March, following the Frankfurt-based central bank’s two tenders of three-year loans in December and February.

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