Bloomberg News

Spain Sells 3.62 Billion Euros of Bonds as Demand Weakens

September 01, 2011

(Adds details about debt sale in Italy in sixth paragraph.)

Sept. 1 (Bloomberg) -- Spain sold 3.62 billion euros ($5.2 billion) of five-year bonds, below the maximum target and amid falling demand, and its borrowing costs fell at its first bond auction since the European Central Bank started buying its debt.

The Treasury said the bond auction, the first since the ECB began buying Spanish debt on Aug. 8, generated an average yield of 4.489 percent, compared with 4.871 percent on July 7, the last time it auctioned a bond maturing in 2016. Demand for the securities was 1.76 times the amount sold, down from 2.85 in July. The Madrid-based Treasury had set a maximum target of 4 billion euros for the sale.

Ten-year Spanish yields climbed seven basis points to 5.11 percent at 10:07 a.m. in London. That’s the highest level since Aug. 9. The 5.5 percent security maturing in April 2021 fell 0.49, or 4.9 euros per 1,000-euro face amount, to 102.89. Five- year yields added 10 basis points to 4.35 percent, the most since Aug. 9. The gap between Spanish and German 10-year yields widened 9 basis points to 291 basis points.

The ECB started buying Italian and Spanish bonds as the sovereign-debt crisis threatened to engulf the euro region’s third- and fourth-biggest economies. As part of policy makers’ efforts to stem the surge in borrowing costs, both countries agreed to take additional austerity steps and enact balanced- budget laws. Spain’s parliament is set to vote on an amendment of its constitution tomorrow to include a “principle of budget stability.”

‘Tepid Affairs’

“These auctions we think consistently now are likely to be tepid affairs,” said Harvinder Sian, an interest-rate strategist at Royal Bank of Scotland Plc in London. “It’s unrealistic at these prices to expect to have engineered some sort of strong investor demand for this paper.”

The Spanish sale came two days after Italy sold 7.7 billion euros of bonds and saw demand fall at the auction. Investors requested 1.27 times the 3.75 billion euros of a new benchmark 10-year bond, down from 1.38 times at the previous auction on July 28.

Italy’s 10-year yield rose for a ninth day, gaining 4 basis points to 5.18 percent, the highest in three weeks. The increase in borrowing costs comes as Italy prepares to fund 46 billion euros in maturing bonds this month, virtually all the country’s remaining maturities for the year. Spain has 14 billion euros of debt to fund by the end of October.

The ECB reduced its debt-buying last week, spending 6.65 billion euros on government bonds, down from 14.3 billion euros the week before, as its initial purchases helped bring down Italian and Spanish 10-year yields from euro-era highs to around 5 percent.

--Editor: Jennifer M. 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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