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Spain Pays High Yield, Garners Good Demand For Bond

Source: Dow Jones - Thu 17th Jun 2010

Spain paid a high price at a closely-watched auction of long-dated government bonds Thursday to secure strong demand and reassure fixed-income investors rattled by concerns about the Spanish banking sector.

The auction results reassured the market ahead of key dates in the Spanish economic and debt calendar, including a visit of International Monetary Fund managing director Dominique Strauss-Kahn to Madrid Friday, which he has described as a "work visit."

It has also come as a relief ahead of the Spanish Treasury publishing details later Thursday of its third-quarter issuance schedule, and major Spanish redemptions next month. Analysts, however, say there must be further successful auctions if investors' perception of Spain is to change.

"For a lift in confidence in Spanish bonds, the auctions today and also the auctions in July needed or need to be taken down smoothly," said Wilson Chin, strategist at ING Commercial Banking in Amsterdam.

Markets have been speculating that recent market pressure and a rise in Spanish yields would force Spain to tap the mammoth financial backstop put together by the European Union and the IMF last month.

But Spanish, EU and IMF officials have all denied a Spanish bailout is imminent, and some analysts also argue that the country isn't in a dire enough situation to require aid. "While market conditions can change rapidly, it is not clear that they have deteriorated sufficiently to force Spain" to turn to the IMF and the EU for help, analysts at JP Morgan Chase & Co. said in a note published before the auction.

On top of that, the strong demand at Spain's auction Thursday "should help restore confidence," said Societe Generale SA strategist Aro Razafindrakola. He added that the level of demand seen wouldn't have been possible without the considerable cheapening undergone by Spanish bonds in recent days.

The Spanish Treasury sold a combined EUR3.479 billion of the 4% April 2020 and 4.70% July 2041-dated government bonds, just below the upper end of the EUR2.5 billion to EUR3.5 billion target range. It received EUR6.83 billion worth of bids for the bonds.

Spain, however, had to pay record-high yields to investors as the spread on Spanish government bond yields over German bunds, the euro zone benchmark, Thursday reached their highest levels since the introduction of the euro currency.

The average yield on the closely watched 10-year bond came in at 4.864%, compared with 4.045% at the previous auction in May. Strong bidding ensured that even the maximum yield of 4.911% was lower than secondary market levels just above 5% before the auction.

"When it comes to issuing paper, demand is there, hinting at strong support from domestic investors, something that is not happening in the secondary markets where Spanish spreads are breaking new wides by the day," said Ioannis Sokos, strategist at BNP Paribas SA. He added that this result could prompt a temporary reversal of the negative market tone surrounding Spain.

However, Spain's debt payment duties in July are likely to keep its bonds under pressure. Bond and Treasury bill redemption and coupon-payment obligations amount to EUR32 billion in July, "thereby creating a pressure point for Spain," Sokos said. He forecast another EUR45 billion to EUR50 billion in bond issuance for the rest of 2010.

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