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Spain Beats Auction Goal as Cyprus Contagion Risk Fades

Spain Beats Auction Goal as Contagion Risk From Cyprus Fades
A Spanish national flag flies from the roof of the Bank of Spain in Madrid. Photographer: Angel Navarrete/Bloomberg

Spain beat its maximum target at a bond auction and its borrowing costs fell even after a rescue package designed to keep Cyprus in the euro was thrown into limbo when Cypriot lawmakers rejected a levy on bank deposits.

The Madrid-based Treasury sold 4.51 billion euros ($5.8 billion) of benchmark bonds, more than its maximum target of 4 billion euros. The two-year security was sold to yield 2.275 percent, down from 2.54 percent on Feb. 21, the five-year 3.557 percent, down from 3.572 percent on March 7, and the 10-year 4.898 percent, down from 4.917 percent on March 7.

Spain is counting on a rally on debt from so-called periphery countries to last after covering about 31 percent of its planned mid- and long-term gross funding needs for 2013 in less than three months. Outstanding public debt in the euro area’s fourth-largest economy’s surged 20 percent last year, reaching 84.1 percent of output.

The yield on Spain’s 10-year benchmark bond fell 2 basis points to 4.9 percent after the auction at 11:08 a.m. in Madrid, narrowing the spread with similar German maturities to 3.51 percentage points. That compares with 4.92 percent on March 15, before euro-area finance ministers decided on an unprecedented levy on deposits as a condition to rescue Cyprus.

Limited Contagion

“The auction went rather well, the fact that the amount sold was higher than the target with the highest demand for 10-year debt is positive,” said Chiara Cremonesi, a fixed-income strategist at UniCredit SpA in London. “Peripheral bonds are performing well for the second day in a row and this auction as well as the market reaction reinforces our view that the spillover contagion risk from Cyprus is very limited.”

The European Central Bank said today it will cut Cypriot banks off from emergency funds after March 25 unless the country’s government agrees on a bailout with international creditors. Cypriot lawmakers this week rejected a plan that would have raised 5.8 billion euros by taxing bank deposits.

Demand for the 2015 note was 4.01 times the amount sold, up from 3.69 last month, while the bid-to-cover ratio was 3.58 for the 2018 security, up from 2.32 on March 7. It was 1.89 for the 2023 bond, down from 2.27. The Treasury is due to return to the markets to sell bonds on April 4.

The yield on Spain’s 10-year benchmark bonds reached a euro-era high of 7.75 percent in July, before European Central Bank President Mario Draghi pledged to do whatever was necessary to hold the single currency together. Prime Minister Mariano Rajoy hasn’t ruled out seeking European aid that could trigger ECB purchases of Spanish debt on secondary markets via its so-called OMT program.

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