LONDON (Reuters) – Spanish bond prices fell on Wednesday after the government paid a high rate to borrow through medium-term bonds, a sign that resurgent concern over the country’s fiscal problems was dampening appetite for its debt.
Euro zone bonds markets showed little reaction after the European Central Bank held interest rates at a record low of 1.0 percent, as widely expected.
Spain sold 2.6 billion euros of 2015, 2016 and 2020 bonds – at the low end of its target range – and the average yield rose on all three.
The premium investors require for holding 10-year Spanish bonds rather than German paper rose to its highest since November at 392 basis points after the sale.
This week’s tough budget failed to calm investors’ nerves, as the government expects Spain’s public debt to jump in 2012 to its highest since at least 1990.
Although Spain has already sold around 46 percent of this year’s planned issuance of long-term debt and therefore is in a favorable funding position compared to its peers, analysts worry it could become the next source of euro zone contagion.
“It was only a lukewarm auction,” DZ Bank rate strategist Michael Leister said. “The key thing here is the volume, they fell well short of the maximum range they intended to sell.”
“This shows that the LTRO (ECB’s long-term refinancing operation) effect is losing momentum and that Spain is having a much more difficult time.”
The ECB injection of 1 trillion euros in cheap 3-year funds has helped depress borrowing costs for struggling euro zone governments since December, easing concern over the debt crisis.
But with no further injections on the cards and in the face of problems with high debt and chronically low growth, yields on Italian and Spanish government debt have crept higher.
In the secondary market, yields on five-year Spanish bonds were up 26 basis points at 4.53 percent, while 10-year yields jumped 24 bps to 5.70 percent, having hit its highest since January at 5.72 percent.
The cost of insuring five-year Spanish debt against default rose further to stand up 20 bps on the day at 457 bps, while the Italian equivalent was 25 bps higher at 407 bps.
Italian CDS were rising faster than Spanish CDS in a “catching up” move caused by “contagion fears”, having outperformed earlier this year, Markit analyst Gavan Nolan said.
Portugal sold 1 billion euros in new 18-month Treasury bills in a successful test of market appetite for the longest-dated debt it has issued since before it secured an international bailout.
LOOKING FOR THE EXIT
The Spanish sale pushed the German Bund future – seen as a safe haven from the euro zone crisis – into positive territory and helped generate solid demand at a 3.37 billion euro sale of five-year German paper. The bond received bids worth 1.8 times the amount allocated.
“Nothing surprising. Everybody is a bit worried about Spain. (The Spanish auction) was very disappointing and helped the German auction,” Lloyds rate strategist Achilleas Georgolopoulos said.
The Bund future was up 34 ticks at 138.63, little changed after the ECB kept interest rates on hold. It had opened nearly a half point lower after U.S. Treasuries sold off overnight when Federal Reserve minutes dampened expectations of further stimulus from the U.S. central bank.
ECB President Mario Draghi was expected in a news conference to resist German pressure to flag an exit from its crisis-fighting measures, with the euro zone recovery still fragile.
“I think Mr. Draghi will signal that the ECB is firmly on hold and it’s too early to talk about exit strategies, given the fragility of the euroland economy and the weakness of bank lending,” Nick Stamenkovic, rate strategist at RIA Capital Markets said.
(Editing by Patrick Graham and Nigel Stephenson)
