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Spain Meets Bond Auction Maximum Target With Surging Costs

Spanish national flags fly above the Bank of Spain in Madrid. Photographer: Angel Navarrete/Bloomberg
Spanish national flags fly above the Bank of Spain in Madrid. Photographer: Angel Navarrete/Bloomberg

Spain paid the most in at least eight years to sell three-year debt ahead of the publication of its banks’ capital needs that will determine how much the euro area’s fourth-largest economy needs from European rescue funds.

The Treasury today sold 2.22 billion euros ($2.81 billion) of bonds, the Madrid-based Bank of Spain said today. That’s above a 2 billion-euro maximum target for the sale. Three-year bonds maturing in July 2015 fetched an average rate of 5.547 percent, compared with 4.876 percent on May 17, and the most since at least 2004.

Spain, which became the fourth euro member to seek a bailout on June 9, will specify today how much it needs of the 100 billion-euro credit line it has been granted to shore up banks burdened with bad loans while tackling a budget deficit as large as that of Greece amid a recession. Spanish bonds rose after European Central Bank Executive Board member Benoit Coeure told the Financial Times that an interest-rate cut will probably be discussed at policy makers’ July 5 meeting.

The yield on Spain’s 10-year benchmark bond fell 3 basis points to 6.66 percent after the auction at 9:58 a.m. in London. That compares with a euro era high of 7.285 percent on June 18, a surge that has prompted Prime Minister Mariano Rajoy’s government to call on the European Central Bank to prop up the nation’s bond market.

Italy, Spain

A bond maturing in April 2014 was sold to yield 4.706 percent, up from 2.069 percent on March 1. The yield was 6.072 percent for securities maturing in July 2017, up from 4.96 on May 3. Demand for the July 2015 and April 2014 securities rose to 3.18 and 3.97 respectively times the amount sold, compared with 3.01 and 2.81 at the last auctions. It was 3.44 times for the five-year bonds, compared with 3.14 in May.

Italy and Spain, which account for more than a quarter of the euro-area economy, are heading for sovereign bailouts in the next 12 months that will send shockwaves through the global economy, Jamie Stuttard, Fidelity Investments’ head of international bond portfolio management in London, said in a telephone interview on June 19.

Both nations may stumble over debt auctions in the next year, forcing European authorities to find official funding for them to hold the single-currency area together, he said.

Spain’s debt agency said on June 19 that it has sold 58.8 percent of the 86 billion euros of medium- and long-term debt it plans to issue this year.

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