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Spain, France meet auction goals, Spanish yields up

Source: Reuters - Thu 15th Sep 2011

Spain and France sold nearly all the bonds they had offered at auctions on Thursday although the sales proved that investors still want a premium for all but the safest euro zone debt.

Spain's Treasury sold almost 4 billion euros of three bonds and, while rates hovered close to nine-year highs investors were more enthusiastic than when Italy visited the market on Tuesday.

Markets had feared a repeat of Italy's auction of long-term bonds at which the Treasury was forced to offer record interest on 5-year paper.

"It is quite positive, they were able to issue an amount that is very close to the maximum expected at a bid to cover a bit lower than we had in May," Alessandro Giansanti, rate strategist at ING, Amsterdam said of the Spanish auction.

Core euro zone economy France sold a total of 9.8 billion euros in nominal and inflation-linked paper and yields fell but demand was slightly lower than recent auctions, suggesting that worries over the banking sector have curbed investor appetite.

Opinions on the French auction were a mixed.

"French auctions saw issuance at the very top end of the indicative range...Cover ratios were, however, soft," said Richard McGuire, strategist, Rabobank, London.

"Recent rising concern over the health of French banks may have had a part to play in these soft cover ratios. Certainly, the more this particular issue weighs on the market, the less convincing France will be as regards a safe haven relative to its core AAA peers."

But some analysts said it still showed France was a good bet compared to its peers.

"It confirms this trend again that there's still more than robust demand for short-dated triple-A paper. You can argue a lot about France's rating but ... everybody is comfortable in buying France instead of picking up a couple of basis points over Bunds in the other triple-As," WestLB strategist Michael Leister said.


Up until July, Spain was at the eye of the storm as investors fretted a Greek-style bailout for the euro zone's fourth largest economy would stretch the aid packet, and political will, to breaking point.

Investors turned on Italy through the summer, pushing the premium investors demand to hold Italian over German debt to euro-era highs of near 400 basis points in August.

Analysts said Thursday's auction showed investors were differentiating between the two countries.

"These results contrast with the relatively weak Italian auctions on Tuesday, highlighting the growing disconnect between these two countries," strategist at Rabobank in London Richard McGuire said.

"Italy (is) looking to have leapfrogged Spain in terms of being seen as the next domino to fall in the ongoing debt crisis."

Italy has had to pay a higher yield on its 10-year paper than Spain for nearly four months as investors become increasingly concerned Rome can't follow Madrid's example and turn around investor expectations.

The difference between Spain's 10-year bond yield and that of an Italian bond of the same maturity fell to its lowest level since the end of April 2009 this week, according to ThomsonReuters data.


The Spanish and French sales came before euro zone finance ministers meet in Poland on Friday to try to put a line under the Greek crisis that has hit global markets and sent borrowing costs for the weaker peripheral countries to record highs.

The outcome for Spain could have been a lot worse without the support of the ECB, which has bought roughly 70 billion euros of periphery debt in the last five weeks in an attempt to stop the crisis worsening.

Analysts say Spain will be able to keep financing at those levels, but if borrowing costs on 10-year debt were to rise as high as 7%, then the country would eventually need a bailout like Portugal or Ireland.

An equivalent aid package for Spain would top 400 billion euros, but if Italy was also forced to request a bailout the euro zone could be forced to put up an estimated 1.3 trillion euros for both country's according to on analyst's estimates.

"The euro cannot proceed as it is. The clock is ticking and everyone is holding their breath while nothing is improving. Spain and Italy have their problems which must be resolved, but a bet against them is a bet against the euro itself," economics professor at business school IESE Jaime Diaz-Gimenez said.

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