Turbulence drives up debt yields at Treasury auction

Investors demanded higher yields at the Spanish Treasury's auction of short-term paper on Tuesday as ongoing pressure in the debt markets pushed up Spain's risk premium.

Investors' appetite for Spanish government debt also eased as they continued to digest the second bailout package for Greece.

The Treasury eventually managed to sell 2.89 billion euros in three- and six-month bills, just shy of its maximum target of 3 billion euros. It sold 750 million euros in three-month paper at a cut-off rate of 1.95 percent, the highest level in three years, and up from 1.578 percent at the previous auction last month.

The government's debt management agency sold a further 2.135 billion euros in six-month bills at a marginal rate of 2.65 percent, up from 1.79 percent in June.

Demand for both issues eased compared with the previous tenders. Orders for the three-month issue amounted to 6.27 times the amount sold, down from 9.49 times in June. The bid-to-cover ratio for the six-month issue narrowed to 2.15 times from 3.84 times.

The peripheral markets got some relief from the approval of additional aid for Greece, which includes the participation of the private sector in the form of debt swaps, but pressure has subsequently been renewed on Spanish and Italian government debt.

"The most important point again is the fact that relative to the last auction yields are much, much higher [...] It's not a good situation to be in," Reuters quoted Monument Securities strategist Marc Ostwald as saying. "It shows we may have had some relief last week but that relief has proven to be rather short-lived."

The spread between the yield on the Spanish benchmark 10-year government bond and the German equivalent widened to 324 basis points from around 318 basis points prior to Tuesday's tenders and Monday's closing level of 326 basis points. The risk premium eventually closed on Tuesday at 322 basis points. Stock investors also remained bearish as the blue-chip Ibex 35 added to recent losses as it closed down 0.33 percent at 9,833.40 points.

Analysts believe the peripheral markets are likely to remain under pressure until the dust has settled on the latest Greek financial deal.

"Borrowing costs are already higher and this is going to be a lasting trend — we are pretty pessimistic on the situation in Europe as the crisis is continuing," Bloomberg quoted Harvinder Sian, a senior bond strategist at Royal Bank of Scotland in London, as saying.