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Spanish Borrowing Costs Surge on Weak Demand

July 19, 2012

Spanish Borrowing Costs Surge as Demand Weakens in Debt Auction

Spain is focusing on selling shorter-dated debt to avoid paying the 7 percent yields investors demand to lend for a decade. Photographer: Angel Navarrete/Bloomberg

Spain sold 2.98 billion euros ($3.66 billion) of notes, in line with its maximum target, and its borrowing costs surged as demand for the securities weakened. The country’s bonds fell after the sale.

The Madrid-based Treasury sold notes due in 2014 at an average yield of 5.204 percent, compared with 4.335 percent when they were last sold on June 7. It sold five-year notes at 6.459 percent, compared with 6.072 percent on June 21 and seven-year securities at an average yield of 6.701 percent.

Demand for the two-year debt was 1.9 times the amount sold, compared with 4.26 last month and the bid-to-cover for the 2017 securities was 2.06, compared with 3.44 in June, the Madrid- based Treasury said. It set a maximum target of 3 billion euros for the sale.

“Nothing looks good,” Ioannis Sokos, a fixed-income strategist at BNP Paribas in London, said in a telephone interview. “Spanish banks have been much less aggressive in buying domestic bonds” as the effect of the European Central Bank’s three-year loans fades.

Spain auctioned debt as lawmakers in Madrid debated spending cuts in a Parliament protected by metal barriers and police. In Berlin, German legislators prepared to ratify their participation in the 100 billion-euro bailout of Spanish banks.

The benchmark 10-year bond yield jumped above 7 percent after the sale from 6.962 percent yesterday to 7.03 percent at 11:25 a.m. in Madrid.

Spanish Banks

Spanish banks, which were among the main beneficiaries of the ECB’s three-year emergency loans in December and February, increased their holdings of domestic debt in the first quarter, before scaling back in April and May, Treasury data show. They held 28 percent of Spain’s outstanding debt in May, compared with 29 percent in April and 17 percent at the end of last year. Non-residents cut their holdings to 37 percent from 50 percent in the five months through May.

Spain is focusing on selling shorter-dated debt to avoid paying the 7 percent yields investors demand to lend for a decade. Still, five-year benchmark yields rose to 6.4 percent today, narrowing the gap with 10-year yields to 61 basis points today from as wide as 154 basis points in January.

To contact the reporter on this story: Emma Ross-Thomas in Madrid at

To contact the editor responsible for this story: James Hertling at

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