Spanish Treasury meets auction issue goal, but at much higher rates

Spain has covered 93 percent of borrowing needs for year; risk premium drops thanks to central banks' intervention

The Spanish Treasury succeeded in selling its maximum target at Thursday's auction of three- four- and five-year government bonds but was obliged to offer rates that were last seen over a decade ago as European leaders struggled to find the means the resolve the ongoing euro-zone sovereign debt crisis.

The Economy Ministry's debt management agency sold 3.75 billion euros of the medium-term bonds at yields of over five percent, above the average borrowing cost for the country as a whole of just under four percent.

Specifically, it sold 1.2 billion euros in three-year bonds at a marginal rate of 5.203 percent, the highest yield since 2000. The cut-off rate was 3.662 percent at the previous tender for paper with a similar maturity held on October 6. Bids submitted for this tranche of the auction amounted to 3.241 billion euros.

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The Treasury sold a further 1.15 billion euros in bonds maturing in January 2016 at a cut-off rate of 5.280 percent as demand totaled 3.253 billion euros.

In the last leg of the tender it issued 1.4 billion euros in bonds maturing in January 2017 at a marginal rate of 5.56 percent, the highest yield since 1997 before the euro came into existence. The rate in the tender held in October was 4.287 percent. The bid-to-cover ratio was 2.68 times.

Whilst borrowing costs were far higher than the Treasury would have liked, the situation might have been worse. Coordinated intervention to improve dollar liquidity the day prior to Thursday's auction by the world's major central banks led by the US Federal Reserve and the European Central Bank helped push Spain's risk premium back below 400 basis points.

Shortly after Thursday's tender the spread between the yield on the Spanish benchmark 10-year government bond and the German equivalent was 376 basis points, down from 395 basis points late Wednesday. It eventually closed on Thursday at 356 basis points.

The risk premium hit a euro-zone record of 499 basis points on November 17 when the Treasury was forced to offer a yield of over seven percent on 10-year bonds for the first time since 1997.

After Thursday's auction, Spain has now covered 93.4 percent of its net borrowing requirements for the year and needs to issue only a further 6.2 billion euros this month. The Treasury is due to sell bonds on December 15 and bills on December 18 and 20.

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