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EURO DEBT SUPPLY-Spain & Portugal to pay hefty premiums

Source: Reuters - Sat 11th Dec 2010

Spain and Portugal look set to pay hefty premiums to whet investors appetite at debt auctions in the coming week seen as a late-year litmus test of appetite for peripheral euro zone paper. Italy will wind up the euro zone's 2010 issuance calendar with an auction of an estimated 6 billion euros of bonds the week after with traders and strategists urging caution given thinning liquidity towards year-end and uncertainty about European Central Bank bond purchase support for the market.

The Spanish Economy Minister Elena Salgado acknowledged on Friday that the country's cost of borrowing would probably rise at Thursday's auctions of 10- and 15-year bonds, Madrid's last this year. "We are paying an average interest rate of 3.6 percent and it is possible that ... we might have to pay 5 percent. But it would only be on those issues that we do at this moment," she said in an interview with Spanish radio station Onda Cero.

Spanish and Portuguese sovereign debt yields in the secondary market have been grinding higher this week as European Central Bank (ECB) bond purchases have slowed to a trickle after the central bank ramped them up last week. The ECB will publish on Monday data of bond purchases in the week to Dec. 8, before Madrid sells an estimated 3 billion euros of 10- and 15-year bonds on Thursday. The difference between Portuguese and German 10-year yields widened 18 basis points on the day to 346 bps with traders pointing to little buying interest from the ECB for peripheral euro zone bonds. Spanish 10-year bond yields were up 13 basis points at 5.45 percent, expanding the yield gap over German benchmarks by 11 bps to 250 bps ahead of the auctions next week.

"I can't really comment on what the outright yield is going to be but we still do continue to view Spain negatively, if you look at the coupon cost as a percentage of GDP in the next few years that's seen as rising," Nishay Patel, a rate strategist at Citi, said.

Citi strategists forecast the coupon cost as a percentage of Spanish GDP rising to over 2 percent by 2013 from around 1.70 percent in 2011 while the equivalent for Portugal is seen above 3 percent from about 2.80 percent over the same period. "They are currently funding (at rates) greater than the weighted average coupon on their existing stock of debt so that's another negative," Nishay said. Doubts the European Union leaders meeting on Monday could reach consensus on how to quell the sovereign debt crisis after Germany and France said there was no need to expand the size of the currency bloc's rescue fund is also keeping investors sidelined from peripheral euro zone debt.

Credit Agricole strategists said the Spanish auctions might also be smaller than initial predictions to take account of thinner market conditions. "The risk surrounding the auction size is simply too large for our appetite, as the market could easily baulk at a large auction size, and if the ECB was not on hand to support Spain's market then we fear tens of basis points underperformance could be at risk," they said in a research note.

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