Yields fall and demand high at first post-election debt test

The Spanish Treasury on Tuesday successfully passed its first debt tender after the ruling Socialists' dismal defeat in regional and municipal elections over the weekend as concerns remained in place about the parlous state of Greece's finances.

The Treasury sold 2.3 billion euros in three- and six-month bills, slightly below the upper limit of its target of between 1.5 and 2.5 billion euros. For the three-month tender, the government's debt management agency sold 999 million euros out of total bids of 6.58 billion euros as the cut-off yield eased slightly to 1.418 percent from 1.440 percent at the previous auction held on April 24.

It sold a further 1.3 billion euros in six-month bills also on heavy demand as the marginal rate eased to 1.798 percent from the previous auction on April 26.

After widening on Monday in part due to the hangover from Sunday's elections, the spread between the yield on the Spanish benchmark 10-year government bond and the German equivalent eased to around 245 basis points on Tuesday.

"The auction was not too bad at all considering the sell-off we had yesterday," Reuters quoted 4Cast Jo Tomkins as saying. "Spreads are biased wider at the moment because the Greek question remains unanswered [...] but [Spanish] domestic bidders have been keen to dip their toes, especially at cheaper levels, even if foreigners are less willing to add to their peripheral exposure."

The idea of Greece needing to restructure its debt has been gathering momentum of late. But in comments Tuesday to Athens-based Skai TV, Greek Finance Minister George Papaconstatinou said restructuring would be a "big mistake." The minister said the government was confident of receiving the 12-billion-euro fifth tranche of its bailout package form the International Monetary Fund and the European Union next month in order to avoid a default.

Moody's Investors Service said Tuesday a default by Greece would likely have negative implications for its credit rating and possibly some other stressed European euro-zone member countries. "The full impact on Europe's capital markets would be hard to predict and harder still to control. The fallout would have implications for the creditworthiness (and hence the ratings) of issuers across Europe," Moody's said in a statement.

Separately, the general manager of Spanish think-tank Funcas, Victorio Valle, dismissed speculation doing the rounds on Monday of possible hidden debt at a regional and municipal level coming to the surface in the wake of the Socialists' various local and regional election defeats.