* Yields drop, demand strong at 12-, 18-month debt sale
* Augurs well for bond auction on Thursday
* Country taps upturn in investor morale for 2nd year
* Fitch says Spain rating not secure, even if no bailout
By Fiona Ortiz
MADRID, Jan 15 (Reuters) – Spain saw its short-term
borrowing costs sink on Tuesday in an auction that drew strong
demand, tapping an upturn in investor sentiment to make early
inroads into its debt issuance programme for the second year
running.
The Treasury sold 3.2 billion euros ($4.28 billion) of a
12-month bill and 2.5 billion euros of an 18-month bill. Yields
on both fell sharply, with the shorter paper dipping under 1.5
percent.
The sum raised beat the top end of the government’s target,
which was 5.5 billion euros.
Sentiment toward Spain – seen as a weak link in the euro
zone due to its a high deficit and shrinking economy – has
improved in recent weeks as yield-hungry foreign investors pile
in, encouraged by the expectation that the European Central Bank
would backstop the country if it needed a bailout.
“This was a really stellar auction, yields have dropped
massively. This is part of the New Year rally we’ve been seeing
in Italy and Spain and bodes well for Thursday’s (bond)
auction,” said Jo Tomkins, strategist at consultancy firm 4Cast.
It plans to auction up to 4.5 billion euros of bonds due
2015, 2018 and 2041 on Thursday. After Tuesday’s sale, the yield
on Spain’s benchmark 10-year bonds reversed a rise, falling to
5.025 percent..
While many investors still anticipate that Spain will
request a bailout from the euro zone’s rescue fund later this
year, the immediate pressure for Prime Minister Mariano Rajoy to
do so has eased as borrowing costs have come down.
According to a Reuters poll this week, 13 of 23 traders
money market traders do not expect any euro zone country to make
the request for aid this year that would trigger support via the
ECB’s bond-buying programme.
Daniel Pingarron, strategist with IG Markets brokerage in
Madrid, said Tuesday’s sale conveyed “a sensation of normality
and absence of panic…”
“Taking into account that the 12-month bills are now
yielding half of the inflation rate, that means that in
inflation terms the Treasury is paying negative yield,” he said.
Spain’s consumer prices rose 2.9 percent year-on-year in
December according to data released on Tuesday by the National
Statistics Institute.
SOFT UNDERBELLY
But deep-seated concerns about Spain’s rising debt burden
and an economy mired in recession and plagued by chronically
high unemployment mean the country’s funding position remains
fragile.
Credit agency Fitch, which ranks Spain two notches above
non-investment grade at BBB, said on Tuesday that rating would
remain under threat for the next 12 months even if the country
was able to avoid a financial rescue.
The other two main credit agencies, S&P; and Moody’s, rate
Spain just one notch above ‘junk’.
At the auction, the average yield on the 12-month bill was
1.472 percent, down from 2.556 percent at the previous sale one
month ago, and it was 1.687 percent on the 18-month paper, down
from 2.778 percent.
The last time the yields were around Tuesday’s level was
last March.
Demand on both bills was solid, with a bid-to-cover ratio of
2.2 on the 12-month paper, versus 2.5 on the last auction, and
2.7 percent on the 18-month bill, in line with the previous
auction. The Treasury plans to discontinue the 18-month paper
after the Tuesday sale, replacing it with a nine-month bill.
Spain’s gross financing needs have shot up to 121.3 billion
euros this year, 7.6 percent more than last year’s total debt
sales, due to piles of maturing debt as well as 23 billion euros
earmarked to rescue regional governments that are shut out of
debt markets.
With Tuesday’s auction, Spain has completed 5.7 percent of
the year’s issuance plan, the Economy Ministry said in a
statement.
Early last year Spain’s government took advantage of lower
borrowing costs to front-load a good chunk of its 2012 financing
needs.
But in June, the auction yield on 12-month Spanish paper
shot up beyond 5 percent.
The country’s borrowing costs dropped steadily again from
late summer, when ECB head Mario Draghi said the institution was
prepared to buy bonds of countries that applied for aid.
