MADRID — Spain gained little relief yesterday from a euro zone leaders’ deal aimed at helping the bloc’s most troubled economies, with the Treasury paying the highest rates in over seven months to borrow 10-year funds.
Madrid sold 3 billion euros ($3.75 billion) in three maturities of bonds at a debt auction, and while demand was solid, yields on the longer-dated bonds were higher than when they were last sold in June.
Peter Chatwell, a rate strategist at Credit Agricole Peter Chatwell, said that at least Spain was still able to raise funds in the market — despite the problems of its banks, many of which have been brought to their knees by the effects of recession and a property market crash.
However, measures agreed by the euro zone leaders last weekend seemed to be having little positive effect on Spain, which is to get European aid to rescue its most troubled banks.
“The market continues to function, but on this evidence there is still no significant change in sentiment or investor demand towards Spanish debt,” said Chatwell.
The leaders agreed to let the bloc’s EFSF and ESM bailout funds buy bonds in secondary markets and directly recapitalise banks. However, the deal is short on details and Finnish opposition has dampened initial positive reactions.
Spain secured aid of up to 100 billion euros for its battered banking sector last month, but concerns persist that the euro zone’s fourth-biggest economy will eventually need a full sovereign bailout.
“Irrespective of the bail-out — which has yet to be finalised — Spain is caught in a pernicious circle,” said Nicholas Spiro, Managing Director of Spiro Sovereign Strategy.
“The weakness of public finances, the depth of the downturn and the vulnerability of parts of the banking sector are all feeding on each other. That the government plans yet more austerity will only make matters worse in the short-term.”
Domestic banks have been the main buyers at Spanish sovereign auctions since the European Central Bank injected nearly 1 trillion euros of cheap credit in December and February to liquidity-starved lenders.
Spanish banks raised their holdings of domestic sovereign debt to from 16.9 per cent of the total in circulation in December to 29.2 per cent in March.
The Treasury sold 747 million euros in the 10-year bonds at an average yield of 6.43 per cent, up from 6.044 per cent at the last such auction on June 7. This marked only the fourth time Spain has sold 10-year bonds this year as it has concentrated on lower, less expensive maturities which were supported by the ECB loans.
The bid-to-cover ratio, a measure of demand, was 3.2 yesterday compared with 3.3 last month.
The Treasury also sold 1.2 billion euros of bonds maturing on July 30, 2015 at a yield of 5.086 per cent, compared with 5.457 per cent on June 21. The bond was 2.3 times subscribed compared to 3.2 times last month.
One billion euros in bonds maturing on October 31, 2016 were also sold at a yield of 5.536 per cent, after 5.353 per cent on June 7, with a bid-to-cover ratio of 2.6, the same as at the previous auction.
Meanwhile, Ireland returned to short-term debt markets yesterday for the first time since before its EU/IMF bailout in November 2010, paying less for three-month paper than Spain which has avoided going to international lenders for a full sovereign rescue.
In a tentative first step following a near two-year hiatus, Ireland sold 500 million euros of treasury bills at an average yield of 1.8 per cent.
Dublin, effectively shut out of capital markets before the 85 billion euro ($107 billion) bailout, is likely to run a number of t-bill auctions before attempting a long-term issue towards the end of this year or early next. — Reuters
