Spain attracted solid demand at dual bond auctions today, though speculation of Greek debt restructuring pushed yields up moderately and showed the euro zone's fourth largest economy is not immune to contagion.
Despite official denials, talk of Greek restructuring has helped pushed Spanish 10-year bond yields to near euro era highs and cast doubt on whether Spain, with an economy twice the size of Greece, Portugal and Ireland combined, can decouple from the crisis gripping fellow high debtors in the region.
Spain's treasury issued €3.37 billion of bonds maturing in 2021 and 2024, at the top end of a €2.5-3.5 billion target, but paid 31 basis points more for the 10-year paper than in March.
Demand was 2.1 times more than the amount on offer, comfortably topping the average for the last three auctions.
The 2024 bond, which was last issued in 2009, sold €885 million at a yield of 5.667 per cent, with a bid-to-cover ratio of 2.3.
"All in all, relatively reassuring results providing no indication Spain's decoupling from the periphery is under immediate threat. That said, the risk of contagion has certainly not been taken off the table," Richard McGuire, rate strategist at Rabobank, said.
"In short, these sales should provide some near term relief but do not address our more medium-term concerns."
The premium investors demand to hold Spanish over German debt fell to 220 basis points from around 222 before the auction.. Portugal's spread, in contrast, stands above 600 bps.
"Spain is not completely disconnected from the concerns about the periphery but in a yield-hungry world there are plenty of investors that want to lock in these relatively attractive yields," said Marc Ostwald, strategist at Monument Securities.
Neighbouring Portugal sold €1 billion of three- and six-month Treasury bills, at the top end of the target range though at higher yields in its first debt auction since requesting a European Union/International Monetary Fund bailout.
The six-month T-bill yield rose to 5.529 per cent from 5.117 per cent in an auction earlier this month before the bailout request, while the yield on the shorter maturity rose to 4.046 per cent from 3.686 in a sale in January.
Demand was solid for both issues.
"Portugal keeps trying to win time (until the bailout comes). Portugal needs liquidity and it has managed to get it via short-term issues," debt manager at Banco Carregosa Filipe Silva said.
"The bid-to-cover is good, but the yields are high, being completely prohibitive. The fact that 3-month T-bill yields are practically the same as Greece's shows that, with Portugal now negotiating a bailout, those lending money demand a much higher premium."
A German sale of €4.47 billion of a new benchmark five-year government bond met healthy demand after Bund prices cheapened in the secondary market before the auction.
A slew of austerity measures and structural reforms have helped convince markets Spain should not be grouped in with troubled euro zone peripheries Ireland, Greece and Portugal, all of which have requested aid.
But analysts estimate that if Spain does eventually lose its ability to borrow from the markets at affordable rates, it could need over €350 billion to be bailed out, testing the euro zone's funds to the limit.
Economists say Spain's economy is a long way from returning to sustainable growth, with unemployment more than double the European Union average.
The Spanish banking system is undergoing a drastic restructuring programme in an effort to shore up resources against the continuing slide in property values.
Worst case scenarios value the recapitalisation of the Spanish banking system at around 10 percent of gross domestic product, though the Bank of Spain expects the final cost to be a fraction of this and most funds to come from private investors.
Spain also has the buffer of a relatively low debt-to-GDP ratio, which the IMF expects to be 64 per cent this year, about 20 percentage points below the euro zone average.
Reuters
