July 24, 2012 / 9:20 AM / 6 years ago

Instant View: Spain's borrowing costs rise at bill sale

LONDON (Reuters) - Spain’s borrowing costs rose at an auction of 3.05 billion euros of three- and six-month Treasury bills on Tuesday.

The average yield was 2.434 percent for the three-month bills compared with 2.362 percent in June and 3.691 percent for six-month paper compared with 3.237 percent.

JOSE LUIS MARTINEZ, ECONOMIST, CITIGROUP, MADRID

“Good ratios, and at rates (that were) less than expected and at decent levels. It is clear that the Treasury can continue to finance itself at these levels, but the problem is private financing. That is to say, the Treasury can do it, but companies cannot.”

ESTEFANIA PONTE, CORTAL CONSORS, MADRID

“It is a good result, with bid-to-cover ratios above those registered at the last auction, when the risk premium was 100 basis points below where it is now.”

NICHOLAS SPIRO, SPIRO SOVEREIGN STRATEGIES, LONDON

“All things considered, the result is not so bad, especially since they are auctions of shorter-dated paper that Spain is counting on to retain market access.

“The most important take-away from this auction is that Spain was able get all its debt out the door. Still, in March, Spain was able to issue six-month debt at a yield of under 1 percent, now it is paying 3.7 percent.”

RICHARD MCGUIRE, STRATEGIST, RABOBANK, LONDON

“Yields have crept higher. They got the full amount issued, a shade more in fact. Yields at these levels are still considerably lower than the peaks we saw when crisis tensions last reached fever-pitch last November. But with the curve flat at around 7.5 percent from five years on and two-year yields already distinctly elevated..., this short-dated issuance is merely a sideshow.”

MARC OSTWALD, RATE STRATEGIST, MONUMENT SECURITIES, LONDON

“It was largely as expected. People will be relieved it has come and gone. It is not going to change anything for Spain and it is not going to reverse the generally weak trend that we have seen. The fears about the euro zone aren’t going to go away.

“The bills are less volatile...and the banks need (them) for balance sheet purposes. That is why they are not a brilliant indication of what is going on. Bonos are a better reflection of investor demand.”

NICK STAMENKOVIC, BOND STRATEGIST, RIA CAPITAL MARKETS, EDINBURGH

“Spain raised the targeted 3 billion (euros), which provides a bit of a relief. But it shows that even at the very front end of the curve, the risk premium for Spanish bonds is rising ever higher.

“The spread between 5- and 10-years moved to negative today, which is a classic sign that the market thinks the current trends are unsustainable for Spain’s fiscal dynamics.

“Yields are likely to continue to rise. We haven’t seen the 2/10-year curve invert but that is just a matter of time. We have seen this in Portugal, Ireland and Greece. I think it is inevitable now that Spain will need a bailout. It is just a question of when rather than if.”

MARKET REACTION:

- Bund future down 97 ticks at 144.58 vs 144.68 before auction

- Spanish/German 10-year yield spread 634 bps vs 633 bps before auction

BACKGROUND:

- The Valencia regional government became the first to ask Madrid for aid to pay overhanging debt obligations on Friday. The tiny region of Murcia was on course to be the second and media reports suggested half a dozen other local authorities were ready to do the same.

- Regional debt worries overshadowed the euro zone finance ministers’ approval of a rescue package for Spain’s ailing banks last week.

- Spain’s 10-year yields have jumped to euro-era highs of around 7.6 percent and five-year yields rose above the 10-year for the first time since 2001 on Tuesday, in a sign market fears of a credit event are increasing.

- For weekly debt supply outlook, click <EURODEBT/O>

Reporting by Marius Zaharia, Emelia Sithole-Matarise, and Ana da Costa in London, Paul Day in Madrid, editing by Swaha Pattanaik

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