Treasury pays pre-euro rates at debt auction

At a debt auction Tuesday, the Spanish Treasury was forced to pay the highest yields on short-term paper since 1997, before the euro came into existence, as the debt crisis in the single-currency zone continued to rock the markets.

The government's debt-management arm sold 2.6 billion euros in 12-month bills at a marginal rate of 5.200 percent, well above the 3.688 percent it paid on October 18. It sold a further 557 million euros in 18-month paper at a cut-off rate of 5.320 percent, up from 3.856 percent at last month's auction. The tender was held as Spain's risk premium hit yet new euro-era highs.

"It's no big thing to pay yields of between five and six percent for a certain period of time; it would be dramatic if Spain was unable to place its debt, and that hasn't happened," Reuters quoted Nicolás López, the director of analysis at M&G Valores, as saying.

As of the end of September, the average yield that Spain was paying on its debt was 3.96 percent, the highest level since 2008, but a burden still considered to be manageable.

The total amount issued, of 3.16 billion euros, fell somewhat short of the Treasury's maximum target of 3.5 billion. Demand for both issues remained healthy, with the bid-to-cover ratio for the 12-month bills 2.13 times and for the 18-month bills close to six times.

M&G Valores' López said that investors are also looking to the general elections, to be held in Spain on Sunday. "It could be that investors will keep their distance somewhat from Spain until they know the outcome of the elections and the new government's economic program."

On the campaign trail in the northern city of Santander, the leader of the main opposition Popular Party, Mariano Rajoy, pledged to fulfill Spain's commitments with the European Union if he emerges victorious at the poll.

Rajoy said the key task that lies ahead over the next few years is to restore confidence in the domestic economy and bring down the risk premium.

"We have to tell Europe that Spain is a serious and reliable country that meets its commitments; that it is one of the great powers, although for years it has had a government that has not been up to the job," the PP leader said. "The task that lies ahead is huge."

The European Commission on Tuesday gave its backing to the Spanish economy. EC spokesman Amadeu Altafaj said the origins of the market pressure in a number of member states, not only Spain, was complex, and was due to phenomena that are not solely linked to the fundamentals of their economies.

Despite support from Brussels and the progress it has made in reducing its deficit by dint of a drastic austerity drive, the extent to which Spain has suffered from contagion from the problems facing Greece and more recently Italy is clearly visible in the jump in the country's borrowing costs.

Prior to Tuesday's auction, Spain's risk premium hit levels of over 450 basis points. The differential between the yield on the Spanish benchmark 10-year government bond and the German equivalent eventually closed up 22 basis points at 455 basis points.

The jump in the risk premium reflected a rise in the yield of the 10-year bond to levels of over 6 percent for the first time since the European Central Bank began buying Spanish and Italian debt in the secondary market in August. That augurs badly for the 10-year bond auction the Treasury is due to hold on Thursday.

The risk premium of France, the Netherlands, Belgium and Austria also hit euro-era record highs, showing the extent to which the future of the single-currency project is at risk.