Spain Borrowing Costs at Two-Year Low Amid Italy Turmoil
Spain’s five-year and 10-year borrowing costs fell to the lowest in over two years at a debt sale today suggesting Italy’s political stalemate hasn’t yet affected confidence in the euro-area’s fourth largest economy.
The Madrid-based Treasury sold 5.03 billion euros of debt ($6.6 billion), in line with its maximum target of 5 billion euros. Its 10-year benchmark yielded 4.917 percent, the least since November 2010, and its five-year benchmark yielded 3.572 percent, the least since September 2010. A two-year bond was sold to yield 2.632 percent, down from 2.713 percent the last time it was offered on Jan. 17.
While investor confidence declined after the majority of the Italian electorate backed anti-austerity platforms of former Prime Minister Silvio Berlusconi and comedian Beppe Grillo, Spanish debt has rallied as investors bet the European Central Bank will prevent an escalation of the crisis. ECB President Mario Draghi speaks at 2:30 p.m. in Frankfurt.
The yield on Spain’s 10-year benchmark bond fell as low as 4.95 percent after the auction at 10:51 a.m. in Madrid. That is about 64 basis points below the highest level reached this year at 5.59 percent after the Italian elections. The spread with similar German maturities widened to 351 basis points.
“Today’s auction was well received” as investors expecting Spain to outperform Italy in coming weeks may have supported demand, London-based Newedge Group fixed-income analyst Annalisa Piazza wrote in an e-mailed comment. Still, “Spain remains at risks of spill-over effects from the Italian political crisis and the country’s public finance is expected to be under pressure due to the weak activity profile.”
Prime Minister Mariano Rajoy is seeking to convince investors Spain can return to economic recovery in the second half after reducing the budget deficit to 6.7 percent of growth domestic product in 2012, excluding European aid to banks. The European Commission predicts GDP will shrink 1.4 percent in 2013 before growing 0.8 percent next year.
Demand for the 2023 security was 2.27 times the amount sold, up from 1.6, while the bid-to-cover ratio was 2.32 for the 2018 note, up from 2.24 last month. It was 4.91 for the 2015 bond, compared with 2.02 in January.
The auction saw the second highest amount of bids since March 2012, Aditya Chordia, a strategist at JPMorgan Chase Bank in London, wrote in a research note. So far this year, the Treasury has sold 35.5 billion euros of mid- and long-term debt, or 29 percent of its planned issuance for 2013, the economy ministry said in an e-mailed statement.
“Spanish bonds appear to be much more resilient after news about the budget deficit reduced the risk of a sovereign credit downgrade,” Ioannis Sokos, a fixed-income strategist at BNP Paribas SA in London, said in a telephone interview. “High demand for the 10-year bond is a positive sign and it could help extend the average maturity of the sovereign’s debt.”
European bond investors from Lazard Asset Management and Pioneer Investments recommend investing in Spanish government debt this year, arguing that the ECB’s backstop will encourage prices to rise.
“The risk premium on peripherals is very competitive,” Cosimo Marasciulo, head of government bonds and currencies at Pioneer, which oversees 156 billion euros, said in London this week.
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