Sunday 22 April 2018

Solid demand for Spanish bonds in unscheduled auction

SPAIN saw solid demand at a long-term bond auction on Thursday, riding a wave of enthusiasm for its debt relative to Italy's that might soon ebb as investors look more closely at a gloomy economic backdrop.

At an unscheduled auction for market makers, the Treasury sold €803m of paper due 2029, 2040 and 2041 more cheaply than in recent issues of the same bonds. The shortest yield fell to 5.224pc from 5.787pc.

That means Spain has already reached more than 30pc of its medium- and long-term debt target for 2013 at sharply lower costs than six months ago, when investors worried about state finances were dumping bonds from across the euro zone periphery.

Spanish yields have fallen relative to Italian debt as market concerns have grown about political deadlock in Rome following an inconclusive election two weeks ago.

But with Spain saddled with chronically high unemployment and caught in a deep recession that looks likely to continue well into 2013, that trend could soon reverse.

"There has been a numbing complacency in the markets with regard to country-specific risk across the euro zone periphery, but particularly in Spain," said Nicholas Spiro managing director at Spiro Sovereign Strategy.

"The bleak economic data coming out of Spain and the scant prospect for meaningful growth point to an underpricing of Spanish risk."

Spain's retail sales fell for a 31st straight month in January, data showed on Thursday, while the country's struggling banks came under more pressure from a court ruling making it slightly easier for Spanish homeowners to fight evictions.

Last July, Spain's bond yields rose to levels not seen since the euro was introduced, with returns on 10-year paper rising above 7.6pc - prompting expectations Madrid would be forced to seek a sovereign bailout.

Its yields have since fallen sharply on a subsequent European Central Bank pledge to support Europe's struggling debt markets, and they have stayed relatively low.

That promise also drove down Italian yields, which have consistently undercut Spanish ones during the euro zone crisis.

But Rome paid its highest three-year borrowing costs since December at an auction on Wednesday after the political paralysis triggered a credit rating downgrade last week.

Meanwhile, the yield on Spanish one-year paper fell on Tuesday at an auction to its lowest level since before Greece was forced to request its first bailout in 2010.

Madrid announced Thursday's off-calendar bond sale following Tuesday's success, an opportunistic move that might be harder to repeat in future.

"They had a window of opportunity before the Italian elections ... but we have risk aversion coming back to the market," said Alessandro Giansanti, a rate strategist at ING in Amsterdam.

"Foreign investors will be shy to invest in long-term bonds issued by the lower-rated countries."

Reuters

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