DEBT MARKET

Spanish Treasury sails through first bond auction of the year

Debt-management agency surpasses issue target at lower rates

Taking advantage of improved market conditions, the Spanish Treasury comfortably exceeded its maximum issue target at its first bond auction of the year.

The debt management arm of the Economy Ministry sold 5.817 billion euros in two-, five- and 13-year bonds, compared with its goal of five billion euros as the rates offered fell in line with an easing of yields in the secondary market.

It sold 3.397 billion euros of a new two-year benchmark issue carrying a coupon of 2.75 percent. The marginal yield emerged at 2.587 percent, down from 3.280 percent at an auction for paper of a similar maturity held in October of last year. Bids for the issue amounted to 7.016 billion euros.

It issued a further 1.949 billion euros in bonds maturing in 2018 as the cut-off rate declined to 4.033 percent from 4.769 percent in a tender held in November. Demand came to 5.050 billion euros.

In the third leg of the auction, the Treasury sold 470 million euros in paper maturing in 2026 at a marginal rate of 5.569 percent, down from 6.218 percent in July.

There’s no imminent concern Spain might go down the same road as Portugal, Ireland and Greece”

Analysts said the outcome of the auction reflected a reduced aversion to risk as investors seek higher yields. “Today’s [Thursday] auction reflects there’s no imminent concern Spain might go down the same road as Portugal, Ireland and Greece,” Fadi Zaher, the head of fixed-income sales and trading for Barclays Wealth and Investment Management in London, told Bloomberg. The three euro-zone countries Zaher mentioned were obliged to seek full bailouts from the European Union and the International Monetary Fund.

Spain has received a loan from the European Stability Mechanism (ESM) of some 40 billion euros to recapitalize its banking sector, but is still weighing up the option of requesting an additional credit line from the European rescue fund. That would trigger bond purchases by the European Central Bank in the secondary market with a view to lowering the country’s borrowing costs.

The government of Prime Minister Mariano Rajoy has taken advantage of an easing of Spain’s risk premium to put off that decision. The spread between the yield on the Spanish benchmark 10-year government bond and the German equivalent has narrowed to levels of around 350 basis points from about 650 basis points in July of last year before ECB President Mario Draghi pledged to do everything within his powers to support the single currency.

Earlier this week, the general manager of the Treasury, Íñigo Fernández de Mesa, said the debt-management agency felt comfortable with current market conditions and that there were no immediate plans to seek assistance from the ESM.

“The first auction of the year confirms an environment in which there has been a clear improvement in funding conditions,” Reuters quoted M&G Valores’ director of analysis as saying. “It is an indication of a certain shift in investment from low risk and zero yields to paper with more attractive yields.”

The Treasury plans to sell a net 71 billion euros in bonds and bills this year to cover an expected central government deficit of 3.8 percent of GDP and replenish the Regional Liquidity Fund.

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