SPANISH 10-YEAR BOND YIELDS NEAR 6% / THE FINANCIAL TIMES ( RECOMMENDED READING )

July 21, 2011 12:08 pm

Spanish 10-year bond yields near 6%

By Miles Johnson

Spain has again been forced to pay punitive borrowing costs in a €2.6bn long-term debt auction that led to the eurozone’s fourth-largest economy selling debt at interest rates not seen since 1997.


An auction of 10- and 15-year bonds seen as a delicate test of investor sentiment amid negotiations over the fate of Greece was met with solid investor demand, in spite of the Spanish government paying a higher rate to borrow than the last equivalent auction in May.


Spain sold €1.8bn of benchmark 10-year bonds at an average yield of 5.90 per cent, up from 5.40 per cent seen at the last sale in a reflection of the amplified anxiety seen over the past month after Italy became the largest indebted European country so far to be dragged into to the market’s spotlight.


The €814m of 15-year bonds also sold at a costlier yield of 6.19 per cent against a previous rate of 6.03 last month, with the total amount raised by both sales coming in just above an already low minimum target of €1.75bn set by the Spanish treasury.


But buoyed by market sentiment over a possible further bail-out for Greece, Spanish 10-year yields fell in the secondary market, hitting 5.74 per cent, their lowest in two weeks.

The premium paid by Spain over Germany, seen as Europe’s safest debtor, fell to 2.9 percentage points, down from a euro-era high of almost 4 percentage points this week.


Analysts also noted that although Spain’s interest costs have been forced higher with every auction, the yield on its benchmark 10-year bonds remained below the 6 per cent level seen by some as a threshold that has eventually forced other eurozone members into bail-outs.


The bid-to-cover ratio for 10-year debt, which weighs investor demand for bonds against the total amount being sold, came in at 1.9 times – higher than the 1.8 times subscription the last time similar debt was sold. For the 15-year maturity there was about double the demand for the amount on sale, down from a level of 2.6 last month.


Thursday’s debt sale followed an auction of shorter term Spanish debt on Tuesday, in which the country’s borrowing costs surged by more than an entire percentage point in an auction for 12-month bills.
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Copyright The Financial Times Limited 2011