Spain kicks off tough 2013 with strong bond sale

MADRID Thu Jan 10, 2013 11:13am GMT

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MADRID (Reuters) - Crisis-plagued Spain kicked off a tough 2013 funding programme on Thursday with a well-received debt auction that raised 5.8 billion euros ($7.6 billion), selling above its target range at lower borrowing costs.

Most of the demand was for a bond maturing in 2015 that would be covered by a European Central Bank bond-buying programme if Spain were to apply for international aid, offering an additional safety net for investors seeking higher returns.

"It was a good auction. Demand was strong for three fundamental reasons: risk aversion indicators are at a low, volatility has nose-dived and portfolios are very liquid," said Jose Luis Martinez, strategist for Citigroup in Madrid.

The market's reaction told the same story, with the yield on Spain's benchmark 10-year bond dipping to 4.97 percent after the auction, its lowest level in 10 months.

Spain is in the midst of a painful recession and the government has drastically cut spending to reduce a high public deficit, which has aggravated the slowdown.

It has to raise 121 billion euros in bonds this year as piles of debt mature, and because it has had to rescue the troubled finances of many of the country's autonomous regions.

At Thursday's sale it sought to raise between 4-5 billion euros, split between three maturities.

The longest-dated bond due in July 2026 raised 470 million euros and was 2.9 times subscribed, compared to 2.1 times when it was last sold a year and a half ago.

That paper sold at an average yield of 5.555 percent, compared with 6.191 percent in July 2011.

AID REQUEST?

Prime Minister Mariano Rajoy has been studying whether to a request international aid to bolster Spain's finances.

But it is unclear whether Spain will follow Greece, Portugal, Ireland and Cyprus in asking for emergency help in a euro zone debt crisis now into its fourth year.

Analysts and a source with knowledge of the situation said demand on Thursday was strong both from both international and domestic investors, potentially easing pressure on the government to request aid.

"Demand was impressive at both the short end and longer end with average yields lower than the previous auction, highlighting strong investor demand, both domestic and overseas," ," said Nick Stamenkovic, a strategist at RIA Capital Markets in Edinburgh.

"Against this backdrop the Spanish government will be in no rush to request external assistance."

Last year, Spain's own banks were the main buyers of the country's sovereign issues as international investors sold heavily. Spain's debt has been downgraded to just one notch above junk status by two credit-rating agencies.

On Thursday the shortest bond, maturing March 31, 2015, raised 3.397 billion euros, with a bid-to-cover ratio of 2.1 and a yield of 2.476 percent.

The third bond, maturing in January 2018, sold at 3.988 percent compared to a previous 4.680 percent when it was last sold on the primary market on November 8.

Demand was higher than the previous auction, with the bond 2.6 times subscribed compared to 1.6 times in November.

($1 = 0.7667 euros)

(Additional reporting by Tracy Rucinski; Writing by Fiona Ortiz; Editing by John Stonestreet)

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