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Spain Sells Bonds as Deeper Debt Crisis Threatens Demand

Spanish Budget Minister Cristobal Montoro
Cristobal Montoro, Spain's budget minister. Photographer: Denis Doyle/Bloomberg

Two days after a senior government official said Spain’s access to debt markets was closed, the country will try to sell as much as 2 billion euros ($2.5 billion) of bonds at interest rates that will probably be higher than at its last auction of similar maturities.

Budget Minister Cristobal Montoro said June 5 that European institutions should help come up with funds to shore up the nation’s lenders as “the door of the markets isn’t open to Spain.” The Treasury is selling two-, four- and 10-year debt, with France auctioning as much as 8 billion euros of securities.

“Comments along the lines of being locked out of the market are very worrying,” John Davies a fixed-income strategist at WestLB AG in London, said in an interview. “Normally, the approach is to try and sound optimistic and talk things up. That’s not how the Spanish rhetoric has sounded recently. It’s going to be painful if they issue 10-year bonds above 6 percent.”

Spain is pressing Germany to allow the European Union’s rescue mechanism to lend directly to banks as it seeks to prop up lenders at a time when its borrowing costs are approaching the 7 percent level that heralded bailouts in Greece, Ireland and Portugal. Concern about the country’s ailing banks has pushed up Spain’s funding costs, while driving down yields in countries considered to be safer such as Germany and France.

Spanish Yields

European Central Bank President Mario Draghi said yesterday he also opposed allowing the European Stability Mechanism, the region’s new bailout fund, to lend directly to banks. Currently the ESM will only be able to lend to governments that meet certain conditions to tap the funds.

“Have we designed the ESM to become a shareholder of banks in the euro area?” Draghi asked at a press conference in Frankfurt. “The ESM wasn’t born for that.”

The yield on Spain’s 10-year bond fell six basis points to 6.22 percent at 8:3 a.m. London time, compared with a euro-era record of 6.78 percent on Nov. 17. The spread with the same German maturities was at 4.88 percentage points, compared with a record 5.48 percentage points on June 1.

At a sale of the 5.85 percent January 2022 bonds on April 19, Spain paid an average yield of 5.743 percent.

‘Notable Performer’

The slump in Spanish bonds contributed to France’s 10-year yield falling to a record 2.07 percent this month. That drop in yields may help lower borrowing costs when France sells debt maturing from April 2019 to April 2060 today. The results will be announced at about 11 a.m. in Paris, and marks the first sale of 50-year debt since 2010. The 10-year yield rose three basis points to 2.44 percent.

“In the 10-year area France has been a notable performer in recent weeks, in doing so bucking the strong widening trend seen in the periphery,” Huw Worthington, a fixed-income strategist at Barclays Capital in London, wrote yesterday in a note to investors.

French bonds were the euro area’s second-best performers in May, returning 3.9 percent, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Dutch securities outperformed, earning 4.3 percent in the period, the indexes showed.

The yield on Spain’s 10-year benchmark bond has risen more than 20 basis points since May 9 when the government nationalized the country’s third-largest lender, Bankia group, and tightened banks’ provisions rules. It was the fourth attempt in three years to clean up an industry hobbled by bad real-estate loans.

‘Becoming Inevitable’

Spain may wait to decide whether to formally request aid until it has preliminary results of an audit commissioned to determine the real value of the banks’ loan books. A first set of conclusions are due in 10 or 15 days, Economy Minister Luis de Guindos said yesterday.

Spain’s recourse to a bailout from the ESM “is gradually becoming inevitable” and would drive the nation’s credit rating to sub-investment grade, Royal Bank of Scotland Group Plc wrote in a report yesterday. Yields on Spanish securities will climb to at least 10 percent after Spain accesses the ESM bailout, RBS strategists wrote in a separate report published on June 1.

Prior to today’s auction, Spain had covered 56 percent of its gross debt issuance needs for this year, Ignacio Fernandez-Palomero, director of public debt, said May 28.

“If you look at Spain’s debt issuance program, they are ahead of the euro-zone average so there is some flexibility for them to issue less,” said Wilson Chin, a senior interest-rate strategist in London at HSBC Holdings Plc.

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