Spanish bonds surpass target in auction

SPANISH BOND markets jumped sharply after the country, for the second time in a week, sold more than its maximum target of debt at a government auction.

Spanish 10-year yields, which have an inverse relationship with prices, fell 25 basis points to 5.43 per cent as traders speculated that some buyers of Madrid’s bonds might be looking to earn a yield pick-up by using them as collateral for loans at next week’s first ECB three-year tender.

One trader at a European bank said: “Some banks are buying sovereign debt to get the high yields for lending to Spain. Then they can take advantage of the low rate of 1 per cent for borrowing three-year money from the ECB.”

However, other market participants said not all banks, particularly larger ones, would want to do this kind of “carry” trade as they were reluctant to increase exposure to peripheral debt markets. Traders warned that the market was still nervous because of expectations that Standard Poor’s would carry out its threat to downgrade 15 euro zone nations.

Spain sold €6.03 billion of bonds yesterday, compared with its upper target of €3.5 billion.

The treasury said the average yield on the 10-year bonds due in April 2021 was 5.55 per cent, slightly higher than the 5.43 per cent at the previous auction of the same paper in October, but lower than the pre-auction rate in secondary market trading of just below 5.70 per cent. It sold €1.4 billion at a bid-to-cover ratio of 2.2 times.

It also sold €2.18 billion of April 2020 bonds at an average yield of 5.20 per cent and bid-to-cover of 1.5, and €2.45 billion of five-year bonds at a yield of 4.02 per cent – more than a percentage point below the previous sale two weeks ago – and at a bid-to-cover of two.

Spanish and Italian bonds have both been supported in the secondary market through purchases by the ECB, but since August Italian yields have leapfrogged those of Spain amid rising investor concerns about Italy’s accumulated burden of public debt.

On Wednesday, Italy paid 6.47 per cent on €3 billion of five-year bonds. That yield is regarded as unsustainable and underlines worries about the euro zone. – (Copyright The Financial Times Limited 2011)