Spain holds 1st 2011 bond sale, Portugal auction calms nerves

 

Spain is likely to pay a premium to sell up to 3 billion euros of 5-year bonds on Thursday as it faces jittery debt markets for the first time in 2011, although a successful offer by Portugal has calmed nerves.

Spanish yields in the secondary market suggested investors would demand around 4.8 percent to buy the debt at auction.

Still, that would be higher than an average yield of 3.576 percent at Spain's last 5-year auction on Nov. 4, when it sold 3.4 billion euros of the bonds. After the November sale, it said it would reduce the size of offers at subsequent auctions.

"It's not the best moment to issue, but they have to. Spain won't have any problem at the auction, but at (high) interest levels that will tie it up over a very long time," a Madrid-based debt trader said.

Portugal sold 1.25 billion euros of bonds on Wednesday, the maximum amount it had targeted. Demand for the debt was high and Finance Minister Fernando Teixeira dos Santos said 80 percent of that was from foreign investors.

The borrowing cost fell to 6.716 on the key 10-year maturity, confounding some expectations that rates would top 7 percent for the first time in the history of the euro zone.

Lisbon's auction was the first major test of investor sentiment on whether Portugal, Spain and Italy can fund their huge debt piles at sustainable levels. The countries are tapping markets this week for as much as 11.25 billion euros.

The bond sale sparked a tightening of peripheral euro zone bonds yields over German Bunds and provided support for the euro.

The currency held on to its gains in Asia ahead of the Spanish auction as the outcome of Portugal's sale raised hopes highly indebted European countries will not be shut out of capital markets.

However, strong demand did little to allay concerns Portugal might eventually become the third euro zone state after Greece and Ireland to ask for an EU-IMF bailout in less than a year. Paying investors returns of 7 percent or more is seen as unsustainable.

Should Portugal seek aid, many see its much bigger neighbour Spain as next in line for a bailout, although just seven of 51 economists polled last week by Reuters thought it would need to apply for a lifeline.

If refinancing costs continue to rise at the pace seen at the end of last year, Madrid may be forced to look to Brussels before the end of 2011.

"The problem is the market is extremely volatile, everyone is short(ing Spanish debt) and everyone is afraid and that could force levels which would leave Spain needing help," the debt trader added.

Italy also goes to the market for the first time this year on Thursday. However, recent debt sales were well bid so traders saw little risk the country would fail to attract investors, despite a large 7 billion euros on offer.

Indeed, analysts say Italy may even benefit from weakness elsewhere in the region. As the most liquid debt market among peripheral nations, it may offer a safer bet for those looking to invest in higher-yielding euro zone bonds.

CHINA SUPPORT

Offering support for Spanish debt, Chinese Vice Premier Li Keqiang said last week that China would continue to buy Spanish paper.

Li applauded austerity measures and structural reforms passed by the government last year aimed at calming market concerns over its public deficit.

An unconfirmed report in a Spanish newspaper said China would buy up to 6 billion euros of Spanish debt.

"While Spain is far from out of the woods, even if the market judges the risk of a bailout more of an outside bet at this juncture, China's pledge of support has caught the markets' eye," 4Cast said in an investor note.

"The 'success' of the Portuguese sale is also seen as a good omen as Spain and indeed Italy are set to call on the markets for the first time this year."

In 2011, Spain plans to issue a net 47.3 billion euros in medium- and long-term debt, down from 62.1 billion in 2010. It tackles redemption hurdles in April, July and October, giving it elbow room in the first few months of the year, say economists.

Spain will forge ahead with structural reforms, Economy Minister Elena Salgado said on Monday. These will include much anticipated changes in the pension system and an extension to a labour market reform to include collective wage bargaining.

The ruling Socialists passed austerity measures worth over 50 billion euros last year and started to restructure its banking sector to calm concerns about its financial system.