Bloomberg News

Spain Misses Maximum Target at Bond Auction as Yields Surge

June 16, 2011

(Updates with yields in fourth paragraph, comment in fifth.)

June 16 (Bloomberg) -- Spain sold 2.84 billion euros ($4 billion) of debt, missing its maximum target, as its borrowing costs rose on growing expectations of Greece becoming the euro region’s first sovereign default. Bonds slumped after the sale.

The Treasury in Madrid said it sold 1.51 billion euros of 15-year bonds at an average yield of 6.027 percent. That compares with 6.068 percent on the secondary market before the sale and 5.953 percent when similar maturity bonds were sold on Dec. 16. Spain also sold 1.33 billion euros of eight-year debt at an average yield of 5.352 percent. The Treasury aimed to sell a maximum of 3.5 billion euros in total.

The yield on Spain’s benchmark 10-year bond surged to 5.72 percent, the most in a decade, as the cost of insuring Greek debt against default also rose to a record. Greek Prime Minister George Papandreou said yesterday he’d call a confidence vote to try to get allies to back a new package of austerity measures demanded in return for a new EU-led rescue.

“Spain is going to remain under siege for the next month,” said Nick Firoozye, head of interest-rate strategy at Nomura International Plc in London. “The market is worried they only did 2.8 billion, it is going to focus on the most negative piece of information of the day.”

Risk Premium

The gap between Spanish and German borrowing costs widened 16 basis points after the sale to as much as 282 basis points, approaching its Nov. 30 euro-era record of 298 basis points. The yield on the 15-year bond sold today rose to 6.129 percent on the secondary market after the auction.

Demand for the 15-year debt was 2.57 times the amount sold, compared with 2.52 times at the December auction. The bid-to- cover ratio for the eight-year securities was 2.13.

The European Union’s failure to contain the Greek debt crisis is sending fresh shockwaves through currencies, money markets, equities and derivatives. The euro lost more than 2 percent against the dollar in the past two days and the cost of protecting corporate bonds soared to the highest level since January, with credit-default swaps anticipating about a 78 percent chance that Greece won’t pay its debts. Equities declined around the world.

Papandreou’s decision came after EU talks on forming a new Greek bailout to prevent the first euro-area default stalled. The impasse over the aid formula and speculation that a government shakeup would disrupt passage of budget cuts and asset sales sent Greek bond yields to euro-era highs and knocked the euro down by more than 2 percent against the dollar in the past two days.

--Editors: Andrew Davis, Jennifer Freedman

To contact the reporter on this story: Angeline Benoit in Madrid at abenoit4@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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