September 15, 2011 / 6:45 AM / 8 years ago

Spain bonds well-received, but at a price

MADRID (Reuters) - Spain’s Treasury sold almost 4 billion euros (3.45 billion pounds) of three bonds on Thursday but paid dearly, even with the support of the European Central Bank, as euro zone leaders struggle to tackle Greece’s debt problems.

A Spanish trader talks on a telephone during a bond auction at a trading floor in Madrid's financial district August 4, 2011. REUTERS/Paul Hanna

The Treasury sold 1 billion euros worth of a 2019 bond and 1.4 billion and 1.5 billion euros of two bonds maturing in April and October 2020, respectively. The amount sold was at the top end of the Treasury’s target of 3 to 4 billion euros, but yields were close to their highest levels since 2002.

The sales come before euro zone finance ministers meet in Poland on Friday to try yet again to draw a line under the Greek crisis that has hit global markets and sent borrowing costs in countries like Spain and Italy to record highs.

The results showed there is no let-up for weaker periphery euro zone countries, after a five-year debt auction in Italy on Tuesday saw its borrowing costs jump to record highs.

“This was nothing spectacular. But the way the background risk is and Greece’s fate on a bit of a knife edge, it’s the best Spain can expect right now,” said Jo Tomkins, analyst at consultancy 4Cast.

Separately, core euro zone country France, under pressure after bank rating downgrades this week, sold 8.5 billion euros in bonds, though demand was weaker than at previous auctions.

Despite ongoing support from the ECB in buying periphery debt, Spain too paid dearly, with yields on all the bonds near or above 5 percent.

The average yield on the 2019 bond was 4.969 percent. On the April 2020 bond it was 5.006 percent, and for the October 2020 bond it was 5.156 percent. All were last sold between April 2009 and December last year.


The outcome could have been a lot worse without the support of the ECB, which has bought roughly 70 billion euros of periphery debt in the last five weeks in a bid to stop the crisis worsening for Spain and Italy.

Borrowing costs jumped to euro-era record highs in August, with the yield on Spain’s benchmark bond spiking to 6.3 percent. On Thursday it was trading around 5.3 percent.

“It’s encouraging they were able to exhaust the range, something which Italy was not able to do on Tuesday. (But average yields) are at uncomfortable territory ... It would be much better to get them lower, and they are ECB-influenced so it’s as good as it gets,” said David Schnautz, strategist at Commerzbank.

Analysts say Spain will be able to keep financing at those levels, but if borrowing costs on 10-year debt were to rise as high as 7 percent, then the country would eventually need a bailout like Portugal or Ireland.

The Treasury saw reasonable demand for the bonds. The bid-to-cover ratio, an indicator of investor demand, was 2.2 on the 2019 bond. It was 2.0 on both of the bonds maturing in 2020.

Additional reporting by Paul Day; Editing by Hugh Lawson

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