Treasury passes auction test after Portugal ratings blow

But agency pays highest rate on five-year bond since 2002

The Spanish Treasury met its sales target at a government bond auction held Thursday despite the increased tension in the sovereign debt markets since Moody's decided to deprive Portugal of investment grade credit status earlier in the week.

The government debt management agency sold 3 billion euros in three- and five-year bonds, the maximum it was looking to place. It granted 1.5 billion euros in the three-year issue at a marginal rate of 4.320 percent, slightly above the level at the previous tender held in June. Demand for the three-year issue was 2.29 times the amount sold. The Treasury sold a further 1.497 billion euros in five-year paper at a cut-off rate of 4.891 percent, up from 4.240 percent at the previous tender. That was the highest yield paid on five-year paper since 2002. The bid-to-cover ratio for this leg of the auction was 2.85 times.

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"At these yield levels, Spanish debt is very attractive," Reuters quoted Nicolás López, director of analysis at M&G Valores, as saying. According to López, at Spain's current credit rating, the country's debt offers the best return-risk ratio in the world.

Moody's cut its credit rating for Portugal to junk status late on Tuesday, citing the possibility of the country needing a second bailout package as Greece has.

The Spanish government has embarked on a draconian austerity drive that includes public sector wage cuts and a pension freeze, as well as spending cuts to reduce its public deficit. It successfully lowered the shortfall on its books to 9.2 percent of GDP last year from 11.1 percent in 2009, and is aiming to further lower it to 6 percent of GDP this year. It has also undertaken reforms of its pension system and labor market in an effort to pacify the markets and distance itself from euro-zone bailout recipients Greece, Ireland and Portugal.

"The economic situation in Spain is radically different," Deputy Prime Minister Alfredo Pérez Rubalcaba said Wednesday in response to Moody's downgrading of Portugal's credit rating. "We are not Portugal, we are not Greece, we are not Ireland."

The spread between the yield on the Spanish benchmark 10-year government bond and the German equivalent widened slightly to 278 basis points from 274 basis points on Thursday. The stock market steadied after Wednesday's sharp losses, with the blue-chip Ibex 35 closing down only 0.08 percent after the European Central Bank raised its key lending rate by 25 basis points to 1.50 percent.

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