Spain short-term yields plummet

 

Spanish short-term financing costs more than halved from a month earlier at auction on Tuesday, with analysts saying banks planned to tap cheap liquidity from the European Central Bank to purchase the relatively high yielding paper.

Separately, Greek borrowing costs rose on a 3-month Treasury bill on Tuesday when the debt agency sold 1.3 billion euros of the debt.

Demand for the 3- and 6-month Spanish Treasury bills was high, with more than 18 billion euros offered for 5.6 billion euros sold, above the targeted amount of 3.5 billion to 4.5 billion euros.

The ECB will offer euro zone banks loans of up to 3 years on Dec. 21 at a rate of 1% in an unprecedented move to fend off a credit crunch that could stall the currency bloc's economy.

Spanish bond yields have tumbled from euro-era highs since the ECB announcement.

"What has happened is that some banks hadn't realized quite how strong the ECB measures were. But there have been European (and Spanish banks) that were able to read the ECB's message and have operated through carry trade," said a treasurer at a Spanish bank.

A carry trade is market jargon for borrowing at at a lower rate to get returens elsewhere at a higher one.

Spain is at the centre of the euro zone debt crisis, with investors concerned a Greek-style bailout for the fourth largest economy would stretch the available aid funds and political will.

But fiscal prudency by the outgoing Socialists and the promise of further cuts by the incoming centre-right government has helped ease jitters and draw a line between it and the euro zone's third largest economy Italy.

RAJOY EFFECT

The ECB tenders may have only been part of the story, however.

"There is a certain logic to the (theory the acquisitions are funded by the ECB tenders). Whether that explains everything is up for debate. Both bills have seen yields that are miles lower, and other factors include Rajoy's proposals yesterday and strong levels of end-of-year demand for high yields," Strategist at Monument Securities, Marc Ostwald said.

"There are lot of people out there looking to park very short dated money over year end and this is as good as any where."

On Monday, Spain's Prime Minister elect Mariano Rajoy pledged deep spending cuts in his first address to the new Parliament after his People's Party (PP) trounced the Socialists in the November election.

On Tuesday, the Spanish Treasury sold 3.7 billion euros of 3-month paper for 1.735%, after an average yield of 5.11% in November, at a bid-to-cover ratio of 2.9, up from 2.8.

The 6-month bill sold for an average yield of 2.435%, down from 5.227%, with 1.92 billion euros sold and demand outstripping supply by a factor of 4.1, after 4.9 a month earlier.

While average yields were down from a month earlier, and around 30 basis points lower than levels seen in the secondary markets before the auction, the Treasury was still paying more than 150 basis points above pre-crisis levels on both bills.