Spain sells long-term debt, weathers Ireland fallout

 

Spain drew solid demand at a sale of long-term debt on Thursday, enjoying a vote of confidence from investors also unnerved by uncertainty over the way the debt crisis in euro zone peripheral peer Ireland will play out.

The Treasury sold a combined 3.6 billion euros in 10-year and 30-year bonds, beating the mid-point of a 3 billion to 4 billion euros target.

Yields rose 50 basis points on both papers compared with equivalent auctions in September, but an analyst said the outcome showed buyers took a relatively positive view of Spain's prospects compared with other struggling economies in the single currency area.

"The auction confirms there is still a good investment base for Spanish bonds" said Jo Tomkins, an analyst at 4Cast.

The average yield on the ten-year bond was 4.615 percent and the 30-year issue had a yield of 5.488 percent. Both slightly undercut equivalent market rates at the time of the auctions.

Analysts said a declaration by Ireland's central bank governor that Dublin was likely to end up taking a big EU/IMF loan - bringing prospects of a bailout closer - came too late to affect the Spanish sale.

Speaking at an event in Madrid, Treasury Director Soledad Nunez said the sales had gone well considering it was a tough week for issuance, and demand was good in the circumstances.

Bids totalled almost 7 billion euros, and there was a bid-to-cover ratio on the 10-year of 1.8, compared to 2.3 last time, while it remained unchanged at 2.1 for the 30-year issue.

By comparison, in Paris core euro zone state France sold almost 8 billion euros of short-dated debt, drawing bids for more than twice the amount at average yields of 2 percent and below.

"At first glance (the French auction) looks a bit more solid ... (It) may reflect to some degree the sense of a triple "A" (rated) country getting that bit more solid demand" said John Davies, an interest rate strategist at WestLB.

PM HOPEFUL ON ECONOMY

Spain's Prime Minister Jose Luis Rodriguez Zapatero chimed in with the relatively upbeat investor mood, predicting the economy would grow again in coming quarters.

"The economy decelerated temporarily in the last quarter. We're looking at a slow recovery, but sustainable" he said.

After edging out of an 18-month long slump in the first quarter, Spain's economy stagnated in the third, data showed on Wednesday, pulled back by a weak construction sector and consumers resigned to austerity measures.

Some analysts are concerned the economy could tip back into recession late this year, but official forecasts are for growth 1.3 percent next year, enabling a lowering of the fiscal deficit to 6 percent of GDP in 2011.

Zapatero reiterated the government's priority was to cut a deficit, which hit 11.1 percent of output in 2009, to an EU guideline of 3 percent by 2013.

He said the economy would take some time to begin generate jobs at a decent pace, after the unemployment rate dropped to 19.8 percent in the third quarter from just over 20 percent before.