Spain’s borrowing costs rose even as it beat its maximum target of 4.5 billion euros ($6.11 billion) at a debt sale today as corruption allegations targeting the government threaten to reverse last month’s rally.
The Madrid-based Treasury sold a total of 4.61 billion euros of debt, including a 2.75 percent 2015 note with a yield of 2.823 percent, compared with 2.476 percent the last time it was sold on Jan. 10. A 2018 note yielded 4.123 percent, up from 3.770 percent on Jan. 17, and it sold a 2029 bond at 5.787 percent, compared with 5.555 percent at its last 15-year benchmark bond sale on Jan. 10.
The sovereign’s securities led declines among the euro-region’s so-called peripheral countries this week even as German Chancellor Angela Merkel backed Premier Mariano Rajoy after he denied receiving illegal cash payments. Demand for Spanish assets is weakening as the Treasury seeks to fast-track a higher net issuance program this year.
“The upper end of the target range wasn’t overshot significantly showing that positive momentum for peripherals has abated,” Norbert Aul, a rates strategist at Royal Bank of Canada in London said in a telephone interview. “We had a very good start this year for peripheral funding and we see some setback potential over the coming weeks even if it isn’t a full-blown sell-off.”
Demand for the 2015 note was 2.21 times the amount sold, compared with 2.07 last month, while the bid-to-cover ratio was 2.24 for the 2018 one, compared with 2.32 in January, and 2.02 for the 2029 bonds from 2.85 last month.
The yield on Spain’s 10-year benchmark bond fell 10 basis points at 5.42 percent after the sale at 12:12 p.m. in Madrid, narrowing the spread with similar German maturities to 3.77 percentage points.
The yield on Spain’s 10-year benchmark security has slumped since a euro-era record of 7.75 percent on July 25, before the European Central Bank unveiled a sovereign debt purchase program on the secondary markets for member states applying for aid from the European Union’s rescue-fund. ECB President Mario Draghi speaks at 2:30 p.m. in Frankfurt today.
Political parties and corruption were already among Spaniards’ top four issues of concern along with unemployment and the economic situation before the so-called Barcenas case rocked the ruling People’s Party last month, a poll by the state-run CIS showed yesterday.
The poll, based on 2.483 interviews, was conducted from Jan. 4 to Jan. 14. before Spanish newspaper El Mundo first published a story alleging former PP treasurer Luis Barcenas made cash payments to senior party officials end of January.
The investigation “is likely to weaken the government’s position,” Ricardo Santos, a euro-area economist at BNP Paribas SA in London, wrote in a note yesterday. “Reforms will be more difficult to pass and implement, and the Spanish government will be much more reticent when it comes to requesting financial support.”
Investors may back off after a hunt for attractive yields boosted sales of Spanish debt last month, Citigroup strategist Robert Crossley wrote on Feb. 5. Pacific Investment Management Co. Managing Director Andrew Bosomworth this week told Bloomberg News that Rajoy’s battle to rebut the allegations is adding to the risk of holding Spanish bonds.
In another interview, Goldman Sachs Group Inc. President Gary Cohn said Europe still faces “fundamental problems” and policy makers lack plans to foster economic growth in southern European nations. Spain’s recession deepened in the last quarter of 2012 and its economy is set to shrink a second year in 2013, undermining the government’s efforts to reorder public finances amid a 26 percent unemployment rate.