Spain yields set to hit 14-year highs at triple auction

 

Spain's borrowing costs are likely to leap to 14-year highs on Thursday, as the euro zone enters a critical phase in its two-year debt crisis and investors ponder how long it will take before rising yields scare buyers away.

The Treasury aims to raise 2.75 billion euros to 3.75 billion euros by selling more of three bonds maturing in 2015, 2016, and 2017, replacing an originally planned new three-year benchmark issue.

Analysts say the auction could well go like Italy's sale of three and 10-year bonds on Tuesday, which drew reasonable demand but saw yields leap to levels deemed unsustainable for public finances.

While yields on Spanish bonds have fallen this week, they are still at high levels and will probably not budge until clear decisions are announced to tackle the euro zone crisis.

Many hope to see some progress in what European Commissioner Olli Rehn said were critical days before a European leaders summit on December 9.

It is only two weeks since Spain auctioned 10-year debt days before a general election that swept a new centre-right government to power, and saw yields hit euro-era highs of 6.975%, a whisker away from the 7% level at which Greece, Portugal and Ireland were forced to seek bailouts.

"The 10-year bond launch was clearly challenging amid hostile trading conditions. And let's face it, things have not got much better," said Jo Tomkins, strategist at consultancy 4Cast.

Investors have been watching Spain since Greece was forced into its first bailout in May of last year, but concerns the euro zone crisis has spread to the core economies have sent risk premiums to record highs in recent weeks.

European Central Bank buying of heavily indebted countries' bonds since August has lent some support but it has not been enough to keep financing costs down in the periphery.

Yields at Spain's sale are likely to be roughly in line with the bonds' secondary trading levels, which could still swing between now and the auction in volatile trading.

The 2015 bond was trading late Wednesday at around 5.65%, the 2016 bond at 5.5%, and the 2017 bond at 5.83%, all a little lower than earlier in the session with reports the ECB was buying Spanish and Italian debt.

At that level, the 2016 bond's yield at auction would be the highest for similar five-year debt since 1997.

The bond maturing on January 31, 2016, has a 3.15% coupon and was last auctioned in February.

The April 30, 2015, bond was last sold on October 6 when its average yield was 3.639%.

The January 31, 2017 bond was last sold on October 20 with an average yield of 4.782%.

If the Treasury sells in the middle of its target range on Thursday it will have completed around 92.5% of its planned issuance of medium and long-term debt for this year.

An analyst at a major euro zone bank said Spain's gross issuance plans for next year would be around 172 billion euros, down from 182 billion euros this year.

That figure could fall should incoming Spanish Prime Minister Mariano Rajoy, who is to be sworn in late December, take more austerity measures as expected.