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Saturday 18 November 2017

Spain’s short-term borrowing costs slump in auction that draws strong demand

SPAIN saw its short-term borrowing costs sink on Tuesday in an auction that drew strong demand, tapping an upturn in investor sentiment to make early inroads into its debt issuance programme for the second year running.

The Treasury sold €3.2bn of a 12-month bill and €2.5bn of an 18-month bill. Yields on both fell sharply, with the shorter paper dipping under 1.5pc.

The sum raised beat the top end of the government's target, which was €5.5bn.

Sentiment toward Spain - seen as a weak link in the euro zone due to its a high deficit and shrinking economy - has improved in recent weeks as yield-hungry foreign investors pile in, encouraged by the expectation that the European Central Bank would backstop the country if it needed a bailout.

"This was a really stellar auction, yields have dropped massively. This is part of the New Year rally we've been seeing in Italy and Spain and bodes well for Thursday's (bond) auction," said Jo Tomkins, strategist at consultancy firm 4Cast.

It plans to auction up to €4.5bn bonds due 2015, 2018 and 2041 on Thursday. After Tuesday's sale, the yield on Spain's benchmark 10-year bonds reversed a rise, falling to 5.025pc.

While many investors still anticipate that Spain will request a bailout from the euro zone's rescue fund later this year, the immediate pressure for Prime Minister Mariano Rajoy to do so has eased as borrowing costs have come down.

According to a Reuters poll this week, 13 of 23 traders money market traders do not expect any euro zone country to make the request for aid this year that would trigger support via the ECB's bond-buying programme.

Daniel Pingarron, strategist with IG Markets brokerage in Madrid, said Tuesday's sale conveyed "a sensation of normality and absence of panic..."

"Taking into account that the 12-month bills are now yielding half of the inflation rate, that means that in inflation terms the Treasury is paying negative yield," he said.

Spain's consumer prices rose 2.9pc year-on-year in December according to data released on Tuesday by the National Statistics Institute.


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