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Spain Meets Target at Bond Auction as Borrowing Costs Rise

Spain Meets Target at First Bond Auction Since EU Summit
The Spanish auction signaled easing concern about the government’s ability to finance the euro region’s third-biggest budget deficit. Photographer: Angel Navarrete/Bloomberg

Spain sold 3 billion euros ($3.8 billion) of bonds, meeting its maximum target, even as borrowing costs rose on two of the three securities sold.

Spain priced its 10-year benchmark bond at an average yield of 6.43 percent, compared with 6.044 percent when the securities were last sold on June 7, and bonds maturing in 2016 yielded an average 5.536 percent, compared with 5.353 percent. It also sold its benchmark July 2015 bond to yield 5.086 percent, down from 5.457 percent on June 21.

Demand for the three-year benchmark was 2.28 times the amount sold, compared with 3.18 in June, and the ratio for the 2016 bonds was unchanged at 2.56. The bid-to-cover for the 10-year security was 3.18 times, compared with 3.29 in June.

The Spanish auction signaled easing concern about the government’s ability to finance the euro region’s third-biggest budget deficit, even as it paid the most to borrow for a decade since November. The government is negotiating the terms of its European bank bailout, while considering additional budget cuts to offset the impact of the recession on tax revenue.

“While the Treasury managed to get all its debt out the door, yield levels were a mixed bag,” Nicholas Spiro, managing director of Spiro Sovereign Strategy said in an e-mailed note. “The weakness of public finances, the depth of the downturn and the vulnerability of parts of the banking sector are all feeding on each other.”

French Sale

Spain’s 10-year bond yield initially fell after the auction before returning to the levels it had been trading at before the sale. The yield was 6.63 percent at 12:45 p.m. in Madrid, widening the difference with similar maturity German debt to 5.18 percentage points.

The Treasury has sold 65 percent of the bonds it plans to sell in 2012, allowing it to maintain a “prudent strategy” at auctions, the Economy Ministry said in a statement today.

France sold 7.83 billion euros of debt maturing in 2019, 2022 and 2023 and the 10-year securities yielded 2.53 percent compared with 2.46 percent in June. Ireland returned to markets today after nearly a two-year absence and sold 500 million euros of three-month bills at an average yield of 1.8 percent. By contrast, Spain paid 2.362 percent to borrow for three months on June 26.

Bank Bailout

Spain is discussing the terms of 100 billion euros of loans for its banks with the European Commission as well as measures needed to cut its budget deficit by around 40 percent this year. Spain’s second recession since 2009 is hampering deficit-reduction efforts and threatening the government’s pledge to bring the shortfall within the European Union limit of 3 percent of gross domestic product next year.

EU leaders agreed on June 29 to let the euro-region bailout funds lend directly to banks and also decided that the financial assistance Spain gets for its lenders won’t have seniority over other creditors.

“The deal has merely shifted the balance of probabilities surrounding an illiquidity event,” Luca Jellinek, head of European interest-rate strategy at Credit Agricole Corporate & Investment Bank in London, said before the sale. “No investor will quickly forget how constrained market conditions became for periphery issuers during the summer holiday period of 2011.”

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