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Spain's cost of borrowing increases on new euro crisis fears

Source: Reuters - Thu 4th Jul 2013
Spain's cost of borrowing increases on new euro crisis fears

Spain's cost of borrowing rose on Thursday as political turmoil in Portugal fanned fears the euro zone crisis will reignite, although the higher returns offered drew good demand for bond sales.

A rift within Portugal's governing coalition following the resignations of 2 ministers this week has pushed up yields on bonds of more indebted euro zone countries and favoured safe-haven paper. Portugal's own 10-year yields shot above 8% for a time on Wednesday but have since fallen back a bit.

Analysts said cheaper prices after a month in which markets have contemplated both a revival of Europe's crisis and an eventual end to central bank stimulus had helped underpin demand at Spain's 4 billion auction and the 7.99 billion French sale.

"While yesterday's dramatic sell-off in Portugal shows peripheral bond markets retain their capacity for brutal price action, the market reaction in Spain and, in particular, Italy has been relatively muted," said Nicholas Spiro, managing director at Spiro Sovereign Strategy.

"The rally in peripheral debt went into reverse some time ago. This is a much more volatile, and a much less forgiving, market environment for Spanish bond sales."

Spain sold 3 billion of a new 5-year bond and 1 billion of an existing 3-year bond, while France sold 10- and 15-year bonds. Both auctions raised all or nearly all their maximum targeted amounts.

Spain paid between 17 and 20 basis points more than it had to sell similarly-dated debt last month, and the 3.792% yield on the 5-year bond was the highest since February.

France saw its debt costs rise by 26-28 basis points from auctions last month, to 2.32% for the 10-year OAT, although its secondary market yields have fallen this week as investors sought out highly rated debt.

Demand was robust at both sales, with demand for the 4 bonds outstripping supply by between 1.7 and 3.5 times.

CREEPING CAUTION

Spain, which was among countries at the forefront of the euro zone's debt crisis last year, has now raised almost 67% of its 2013 bond issuance target. It took advantage early in the year of demand for higher-yielding debt from investors flush with cash pumped in by global central banks.

Signals from the U.S. Federal Reserve that it will soon start scaling back its massive money-printing programme have roiled markets in the last month, however, with fresh political tensions in Portugal and Greece also hitting confidence.

Spain's benchmark 10-year bond yield rose to around 4.8% on Thursday from a May low of 4% but is still a long way from its peak of over 7.6%, hit last July before the ECB pledged to do whatever was needed to defend the euro.

Portugal's prime minister, Pedro Passos Coelho, and junior coalition party CDS-PP were seeking on Thursday to heal a rift that risks derailing Lisbon's exit from its EU / IMF bailout.

Aid payments Greece needs to keep afloat could meanwhile be frozen after Athens said on Wednesday it would not meet targets on reforming its public sector by an end-of-the-week deadline set by its international lenders.

The ECB left interest rates unchanged at its monthly meeting on Thursday, and ECB President Mario Draghi sought to reassure investors rattled by the resurgent political worries and the prospect the Fed will stop printing money.