Spain Sees Strong Demand at Bond Sale, But Yields Jump

Spain's borrowing costs jumped at an auction of three- and five-year bonds on Thursday, though the sale met strong demand in a sign that investors are not losing their appetite for the country's debt if the price is right.

The sale was the first since Standard and Poor's cut Spain's credit rating by two notches to BBB+ last week and followed data showing the economy has slipped into its second recession since late 2009.

The Treasury issued 2.5 billion euros ($3.3 billion), at the top end of a relatively small targeted amount after it reached half of its gross issuance target for 2012 in the first four months of the year.

The yield on the longest bond, maturing in July 2017, rose close to 5 percent.

Take-up rates were healthy, suggesting continued demand from the domestic banks that have underpinned recent debt sales.

Spanish bond yields fell after the auction but Bunds briefly pared earlier losses, with some of the details in the results disappointing the market.

"With foreign investors becoming even more risk averse, it's the 'domestics' that are holding the fort," said Nicholas Spiro, from Spiro Sovereign Strategy.

"...As is invariably the case with Spanish auctions, there were mitigating factors at work - particularly today's fairly modest volume... The rapid deterioration in sentiment towards Spain is showing up mostly in higher yields. Demand is still there for the time being."


In France, 10-year borrowing costs stayed relatively stable on Thursday at the country's last debt auction before a presidential election on Sunday that has kept some investors on the sidelines, concerned about a potential Socialist government.

France sold 7.4 billion euros of long-term OAT bonds, at the top of a planned issue range of between 6.5 billion and 7.5 billion euros, despite the political uncertainty.

Spain has surged to the forefront of the euro zone debt crisis due to concern over its public deficit and shrinking economy and pressure is growing for a plan to recapitalise its banks, which are burdened with bad debts from a property market crash.

Spanish lenders, virtually cut out of wholesale debt markets after losing billions since a decade-long property bubble burst in 2008, snapped up cash the European Central Bank pumped into the euro zone banking system in December and February, in operations totalling more than a trillion euros.

Recent data from the Bank of Spain suggests that they used a portion of the ECB's ultra-cheap three-year money to buy up high-yielding sovereign debt.

According to the central bank, Spanish lenders held just over 13 percent of domestic debt in November 2011, but that total soared to almost 30 percent by March.

Non-residents held almost 56 percent of all Spanish debt in November, but by March, that proportion had fallen to 38.8 percent.

In Thursday's sale, Spain sold 979 million euros of a bond maturing July 30, 2015 at an average yield of 4.037 percent and a bid-to-cover ratio of 2.9, compared to a ratio of 2.4 at the last auction in March.

It also sold 764 million euros of a bond maturing January 31, 2017 at an average yield of 4.752 percent. The bond was 3.7 times subscribed, after 2.7 times at the last primary auction in February when the bond sold at an average yield of 3.565 percent.

It also sold 773 million euros of a bond maturing July 30, 2017, at a yield of 4.960 percent. It was 3.1 times subscribed.