Spain’s borrowing costs jumped and demand fell at a bill sale a day after Moody’s Investors Service downgraded 28 Spanish banks.
The Treasury sold 3.08 billion euros ($3.85 billion) of bills, beating a maximum target of 3 billion euros. Three-month bills fetched an average yield of 2.362 percent, compared with 0.846 percent at the last auction on May 22, and six-month bills an average rate of 3.237 percent, compared with 1.737 percent.
Spain’s 10-year borrowing costs rose for a second day, edging toward 7 percent, after Moody’s yesterday cut at least 12 banks’ ratings to junk, saying the government’s weakening credit profile undermined its ability to backstop lenders. The downgrades came as Spain negotiates the terms of a 100 billion- euro loan requested for its banks on June 9.
Economy Minister Luis de Guindos told lawmakers in Madrid that lenders receiving public funds may have to remove risky assets from their balance sheets. Some conditions will apply solely to bailed-out lenders while others will be “horizontal” for the whole industry, de Guindos said.
“These sales further underline the difficulty Spain faces in financing itself at a sustainable level,” said Richard McGuire, a senior fixed-income strategist at Rabobank International in London.
“A failure to see much in the way of traction at this week’s EU summit, as seems decidedly possible, will likely put further strong additional pressure on Spanish yields, thereby rapidly raising the prospect of additional bailouts,” he said.
Demand for the bills was lower, at 2.6 times the amount sold for the three-month securities, compared with 3.95 times in May, and a bid-to-cover ratio for the six-month bills of 2.82 compared with 4.3.
The Treasury said it has completed 61.7 percent of its planned sales of medium- and long-term debt for this year.
The yield on Spain’s 10-year bond rose as much as 5 basis points to 6.719 at 11:05 a.m. in Madrid after the auction. That widened the gap with similar German maturities to as much as 5.18 percentage points, compared with a record 5.89 percentage points on June 18.
Spain is the fourth euro member to have requested a bailout and Cyprus followed yesterday, hurting demand for Italian debt. Italy today sold 3.91 billion euros of bonds, near the maximum set for the auction. The average yield for the 2.99 billion euros of zero-coupon 2014 debt rose to 4.712 percent from 4.037 percent at the previous auction on May 28.
“The auctions in Spain and Italy were a little soft,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “The amounts sold look reasonable, but it’s the underlying weakness that the market is paying attention to.”
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