Spain Borrowing Costs Drop in EU803 Million Surprise Sale

Spain’s borrowing costs fell at an extraordinary auction as the euro area’s fourth-largest economy retains investors’ confidence amid market turmoil in Italy.

The Madrid-based Treasury sold 803 million euros ($1.04 billion) of bonds maturing in 2029 to yield 5.224 percent, down from 5.787 percent on Feb. 7, 2040 bonds at a yield of 5.434 percent, down from 5.893 percent on Dec. 13, and 2041 bonds at 5.432 percent, down from 5.696 percent on Jan. 17. No target was set for today’s sale, which was limited to primary dealers.

Spain announced the unscheduled auction earlier this week as the yield on its 10-year benchmark bonds fell to the lowest since November 2010. The nation’s bonds yesterday completed their longest winning streak since August 2005, while Italy’s borrowing costs climbed at an auction amid concern a political deadlock may derail plans to fix the country’s finances.

“The fact the Treasury went for a public auction suggests they expected more demand for the bonds than the buyers they had already identified,” Justin Knight, a London-based rates strategist at UBS AG, said by telephone. “There seems to be interest from investors looking to cover long-term liabilities with some extra yield, such as pension funds or insurance companies.”

Demand Climbs

Demand for the 2029 security was 4.1 times the amount sold, up from 2.02 last month. The bid-to-cover ratio was 2.4 for the 2040 bonds, up from 2.09 in December and 2.13 for the 2041 bonds, up from 2 in January.

Investor confidence has rebounded in Spain even as it wanes in Italy after most voters backed the anti-austerity platforms of former Prime Minister Silvio Berlusconi and comedian Beppe Grillo. The yield on Spain’s 10-year benchmark bond rose two basis points to 4.84 percent at 11:09 a.m. in Madrid.

That’s nearly three percentage points less than the euro-era record of 7.75 percent reached in July, before European Central Bank President Mario Draghi pledged to support the single currency. The spread with similar German maturities widened to 335 basis points.

While the European Commission predicts Spain’s gross domestic product will shrink 1.4 percent this year, Prime Minister Mariano Rajoy forecasts an 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 Treasury, which said March 12 it had covered 30 percent of its planned mid- and long-term debt issuance for 2013, returns to the markets twice this month, to sell three- and nine-month bills on March 19 and bonds on March 21.

Before it's here, it's on the Bloomberg Terminal.