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Spain bond sale sees sluggish

Source: Reuters - Thu 1st Sep 2011

Spain's first bond auction in a month drew lukewarm demand on Thursday, forcing it to pay a high premium to place 3.6 billion euros of new five-year paper despite European Central Bank support on secondary markets.

The amount sold was just above the middle of its target of between 3 billion and 4 billion euros, but demand was down on previous sales and the Treasury paid around 20 basis points above the yield of an existing five-year paper to get the bond away.

German Bunds - used by investors as a safe haven from the troubles of the euro zone's indebted periphery -hit their highest on the day after the sale.

The Spanish bond's path was eased, as in Italy's auctions on Tuesday, by ECB purchases aimed at stopping the debt crisis from engulfing the bloc's larger states. For Spain alone borrowing costs have fallen on its ten-year debt by over 100 basis points in the last three weeks.

Separately, France saw few problems as it sold 7.8 billion euros in three bonds which analysts said were well-received.

The average yield on the Spanish bond was 4.489%, compared with a 4.25% yield on a different 5-year bond with a different coupon, on the secondary market late on Wednesday.

The new issue was reasonably well bid in the market, with a bid-to-cover ratio of 1.8, but that was down on the 2.9 seen at Spain's last auction of five-year debt in July.

"Overall we regard the auction result as disappointing, with Spain paying a large concession on the market to sell the new bond and declining demand," said Chiara Cremonesi, analyst at UniCredit.

The ECB has bought around 43 billion euros worth of debt since it reactivated its bond-buying programme, helping to lower financing costs of struggling euro zone states.

However, market volatility and a lack of final agreement over Greece's second bailout package and an extension of the European Financial Stability Facility (EFSF) will keep markets nervous for some time.

Analysts believe Spain could not afford borrowing costs of more than 7% over a long period without eventually being forced to take a bailout like Greece or Portugal.

Spain has scrambled to pass new austerity measures in the last two weeks to help meet its tough public deficit cutting target this year, while it also plans to include a deficit capping measure in its constitution.

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