Spain Auctions Debt at Record Lows as Growth Accelerates

Spain’s Treasury sold three-year to 10-year debt at record low yields after the Bank of Spain said growth sped up in the first quarter, underpinning a recovery in the euro region’s fourth-largest economy.

The nation’s benchmark three-, five- and 10-year bonds were sold today to yield the least since the start of series in 2004 and 2005, data released by the Madrid-based central bank showed. The sale took place after the Bank of Spain estimated in its monthly bulletin that Spain’s gross domestic product expanded 0.4 percent from the previous quarter in the first three months of the year, beating economists’ estimates.

While the economy has grown for three straight quarters after emerging last year from its second recession since 2008, Prime Minister Mariano Rajoy has called on the European Central Bank President Mario Draghi to tackle the euro’s appreciation and deflation concerns threatening Spain’s competitiveness.

“Investors are more confident that the progressive structural reforms are filtering into the real economy,” Annalisa Piazza, a fixed-income analyst at Newedge Group in London, said in an e-mailed comment today. The debt sale “received good demand, confirming the appetite for the European monetary union periphery’s debt despite record low yields,” she said.

Debt Burden

The first-quarter performance means Spain is on track to post a 1.2 percent expansion this year, the Bank of Spain said. The government has targeted growth of 1 percent.

Carrefour SA, France’s largest retailer, this month said that a 0.1 percent gain in same-store sales in Spain, its third-largest country by revenue after France and Brazil, helped offset weakness in Italy and China in the first quarter.

Rajoy still needs to battle a debt burden approaching 100 percent of economic output while inflation has slumped, with prices falling last month for the first time since 2009. Unemployment will remain close to 25 percent through 2015, the International Monetary Fund forecasts.

“There is a risk of deflation,” said Alfredo Arahuetes Garcia, head of the economy department at Pontificia Comillas University in Madrid. “Costs are being clamped down on everywhere and wages aren’t being raised.”

Bond Yields

All the same, investors are flocking back to the country as improving confidence in its economy helped push Spain’s five-year borrowing costs this month to below those of the U.S. for the first time since 2007. Stocks have surged, with the benchmark Ibex-35 index gaining 5.7 percent this year.

The yield on Spain’s 10-year bonds was at 3.06 percent at 12:57 p.m. in Madrid, up from its eight-year low of 3.039 percent reached yesterday. That compares with a euro-era high of 7.75 percent in 2012, when the government had to seek European Union aid to bailout its banking sector. Spain now pays 152 basis points more than Germany to borrow for 10 years, compared with a peak of 650 points in 2012.

The Treasury today sold 5.56 billion euros ($7.69 billion) of debt, exceeding its maximum goal for the sale, as notes maturing in April 2017 and April 2019 were sold to yield respectively 1.022 and 1.663 percent, while its bond maturing in April 2024 was sold to yield 3.059 percent. Spain’s five-year borrowing costs were close to those of the U.S., which yesterday paid 1.7 percent.

The government will issue less than its planned net target of 65 billion euros this year as the cost of servicing debt has fallen while tax receipts are increasing, Economy Minister Luis de Guindos said yesterday.

“Faster growth is consistent with indicators showing job creation as well as stronger consumer confidence and industrial production,” said Victor Echevarria, an economist at BNP Paribas SA in London. “A continued improvement on the labor market and an increase in credit will be key for the expansion to continue.”

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