Business World

Monday 20 January 2020

Market fears at jump in Spanish borrowing costs at bond auction

Rising concern Madrid will struggle to meet tough deficit targets

Mario Draghi. Photo: Reuters
Mario Draghi. Photo: Reuters

Nigel Davies and Andrei Khalip

SPANISH borrowing costs jumped at bond auctions yesterday, spreading fear in wider European markets and overshadowing a successful step back into debt markets by neighbouring Portugal.

Spain sold €2.6bn of debt, at the low end of its target range, with a bond maturing in 2020 yielding an average 5.338pc, up from a forecast 5.2pc and 5.156 when it was last sold in September.

Portugal sold €1bn of 18-month T-bills, its longest dated debt since the EU and IMF bailed it out, with a 4.537pc yield, compared with 5.993pc yield shortly before the rescue.

However, EU Commissioner Olli Rehn said European policymakers should be ready to provide more help to Portugal some time in the future.

"From the EU side, it would be wise to be prepared that some kind of bridge needs to be built when Portugal returns to the markets," Mr Rehn told MTV3.


He added that Portugal's situation was different to that of Greece in the Finnish TV interview shown yesterday.

But growing concern that Spain will struggle to meet tough deficit targets and treat its ailing banks as the economy slows have hampered its debt issuance plans and fuelled concern it might be forced to follow Greece, Ireland and Portugal in seeking a bailout.

"Spain has become the focal point for investor anxiety about the eurozone. This is a bout of investor nervousness," said Nicholas Spiro at Spiro Sovereign Strategy.

European shares extended their losses after the auction and the cost of insuring Spanish and Italian debt against default rose. Spanish yields rose on the secondary market, where the key 10-year bond was up around 25 basis points close to 5.7pc.

Yields on 10-year debt had fallen as low as 4.6pc in late January as cheap ECB cash aided a rally in weaker periphery state debt.

Concern over the Spanish auction also helped drive the euro to a three-week low versus the dollar.

Meanwhile, the auction in Portugal, which its Finance Minister Vitor Gaspar called "a successful bet", encouraged investors, but failed to quash doubts that Lisbon could finance itself fully in the commercial debt market from the second half of 2013 as its bailout deal envisages.

Madrid's debt sales were still supported by a wave of cheap three-year funds provided by the ECB in December and February, but rising yields showed support waning.

A tough budget presented on Tuesday, including €27bn of savings, did little to assure investors the country will be able to meet its deficit obligations.

Spain is at least ahead of the curve, having completed 47pc of its debt issuance plans for the year in a little over three months. The average yield of a bond maturing in 2015 was 2.890pc, up from 2.440pc when it was last sold on March 15, but below analysts' expectations of around 3.1pc.

A 2016 bond, however, yielded 4.319pc after 3.376pc a month ago and analysts' expectations of 3.95pc.

Portugal fared well as it took a gentle step in selling its longest dated debt since its bailout.

The IGCP debt agency also sold €500m in six-month T-bills at an average yield of 2.90pc, sharply down from February's 4.332pc.

The total amount of T-bills sold in the auction was at the top of the indicative offer range. Demand outstripped the amount placed by 2.6 times on 18-month bills and 5.0 times on the six-month maturity.

Yields in T-bill placements have fallen steadily over the past couple of months, allowing Portugal to increase the amounts and lengthen the maturities of its T-bill issues.

Most investors say Portugal, which is in a deep recession, may need additional rescue funds, and some express fear of a Greece-style debt restructuring.

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