Spain & France see demand for bonds

Spain and France found buyers for a combined 11 billion euros of government bonds on Thursday, with solid demand for the Spanish issue helping to calm market fears Greece's debt crisis may spread to euro zone periphery states .

Spain sold 2.3 billion euros ($3.09 billion) of five-year bonds on Thursday, paying more than it did two months ago but easing market jitters as investors drew a clear line between its risk profile and that of Greece.

A Spanish Treasury spokesman said the issue was well diversified between domestic and foreign buyers.

France sold 8.7 billion in auctions that saw good demand at low yields, reinforcing the status of the country's debt as part of the euro zone's low-risk core centred on Germany.

Markets reacted positively to the Spanish sale, the first since Spain's debt rating was cut by Standard & Poor's last week, sending the euro zone government bond benchmark Bund future to an intraday low of 125.74 as some money trickled out of safe-haven German paper.

"I would not say this is a strong auction as the amount sold is relatively low, but more importantly it shows that Spain's market still functions well and does not pose a risk to their ability to fund," said Peter Chatwell, rates strategist at Credit Agricole.

YYields on Spain's benchmark 2015 issue with a coupon of 3 percent rose to 3.6 percent, up from 2.8 percent at the last issue in March and reflecting tougher market conditions afflicting Spain. The Treasury had aimed to raise 2-3 billion. The bid-to-cover ratio rose to 2.4 from 1.5, showing healthy demand. Earlier the spread between Spanish government bonds and Bunds had widened to its highest level since the inception of the euro over 140 basis points, though still way off the over 800 basis points between Greek debt and Bunds.

The crisis has put the foundations of the euro zone into question, forcing France and Germany to pledge to protect and urge tighter rules for the stability of the single currency, which is hovering around to a one-year low.

Analysts said the Spanish issue fared well given those market tensions. "The amount sold was more or less mid-range of forecasts so it reduces a bit the idea that it is a problem for Spain to issue bonds," said Luca Cazzulani at UniCredit.

However, he said that Spain would need to step up the rate of issuance to meet its targets this year, meaning future auctions may have to be much larger.

The French auction was also well received by markets, which analysts said benefited from contagion risks hitting periphery euro zone countries including Spain and Portugal.

"Although the spread versus Bunds has widened somewhat too, bonds are also massively benefiting from the escalation in peripheral contagion risk as outright yield levels are at very low levels," said David Schnautz, strategist at Commerzbank.

However, some spillover from the crisis has been seen. On Tuesday cost to insure the debt of Germany and France rose to their highest levels in more than a year.