April 19, 2012 / 9:13 AM / 6 years ago

Instant view: Spain sells 2.5 billion euro of bonds

LONDON (Reuters) - Spain sold 2.54 billion euros of government bonds on Thursday in an auction that met solid demand, though with 10-year borrowing costs rising as investors worried the country may miss budget deficit targets and over the health of its banking sector.

A 10-year bond was sold at a yield of 5.743 percent compared with 5.403 percent when the paper was sold via a syndicate in February. The yield on a two-year bond dipped to 3.463 percent from 3.495 percent at a previous auction on October 6.

Demand for both bonds was higher than at their previous sales.

NICHOLAS SPIRO, MD, SPIRO SOVEREIGN STRATEGY, LONDON

“Although more sentiment-shaping, the modest size of today’s auction clearly helped mitigate the growing nervousness surrounding Spain. Right now, the overriding concern for the Treasury is to ensure that its issuance targets are met and it achieved this today with continued support from domestic banks. It was a given that yields would rise. Spain’s bond market has entered a perilous “post-LTRO” phase in which fundamentals are at least as important as liquidity in determining auction results. January’s bumper sales are now a distant memory.”

“This week’s Spanish auctions were a relative success. But this may be a temporary reprieve more than anything else.”

RICHARD MCGUIRE, RATE STRATEGIST, RABOBANK, LONDON

“Overall, then, a reasonable set of results which will go some way to allaying fears the domestic bid for Spanish bonds has dried up. That said, as evidenced by the accepted yield on the 10-year, this support does come at a price. Meanwhile, the market had clearly set itself up for a positive outcome and, hence, the hurdle for an unexpectedly favorable set of results had risen.

“This may explain the retracement of this morning’s gains along the Spanish curve in the wake of these data. On a broader level, we expect crisis tensions to continue to ratchet higher going forward as fundamentals continue to reassert themselves post the recent short-lived liquidity boost to market sentiment.”

NICK STAMENKOVIC, BOND STRATEGIST, RIA CAPITAL MARKETS, EDINBURGH

“They’ve achieved their target although it was a modest one. Bid/cover ratios both in the two- and 10-year pretty decent, but yields are clearly high.”

“The bigger story for Spain remains one of fiscal position and growth. Until we see signs that the government is implementing the medium-term fiscal consolidation program and signs of life in the Spanish economy, investors are going to worry about the trajectory of the debt-to-GDP ratio (gross domestic product) in the medium-term.”

“The risk is that any fall in yields will be short-lived until the credibility of the Spanish government improves.”

MARC OSTWALD, STRATEGIST, MONUMENT SECURITIES, LONDON

“The most encouraging part is they sold more of the 10-year than they did of the two-year. That was quite important because if it had been skewed the other way around then people would have thought, if all they can rely on doing is selling lots of short-dated bonds they are creating themselves a (refinancing) problem at a time when their overall debt levels are rising.

“It’s been clear ... that there has been heavy domestic buying, a lot of the demand has come from the domestic institutions, above all official institutions.

“What does it tell us? Well, they got over this hurdle and the next one is not far away.”

PETER CHATWELL, RATE STRATEGIST, CREDIT AGRICOLE CIB, LONDON

“It’s a mixed auction. From the treasury’s perspective, it is good, selling the maximum amount. The reason Bunds spiked and there might be some disappointment right now is that it priced slightly cheaper than the secondary market. But, given the market volatility, I would not read too much into this. It’s job done for this round.”

MARKET REACTION:

- Bund future down six ticks at 140.30 vs. 140.15 before auction.

- Spanish/German 10-year bond yield spread 423 bps vs 415 bps before auction.

Table: See [ID:nL6E8FIFKZ] for full auction details.

BACKGROUND:

- Spain had already raised 47 percent of its gross issuance target for this year after front-loading borrowing to take advantage of abundant European Central Bank cash in the financial system.

- For weekly debt supply outlook, click

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