Treasury sells almost twice its target amount at auction

Risk premium narrows as bond yields decline

For the second time this week, the Spanish Treasury took advantage of an easing of pressure on the markets to sell more than its maximum target at Thursday's government bond auction, allowing it to meet its funding needs for the year.

The government's debt-management agency issued a total of 6.03 billion euros in bonds with maturities of five, nine and 10 years, compared with the goal it set itself of up to 3.5 billion euros. The yields offered were below those in the secondary market, while total demand came to 11.214 billion euros.

The Treasury on Tuesday sold 4.94 billion euros in 12- and 18-month bills when it was only looking to issue up to 4.25 billion euros. It has now fully completed its debt issue target for the year, which amounted to 93.8 billion euros, with another tender of bills scheduled for next week.

At Thursday's auction, the Treasury sold 2.177 billion euros in bonds maturing in 2010 at a cut-off rate of 5.39 percent, compared with 5.050 percent at an auction of paper with the same maturity held in September. Demand for the issue amounted to 3.318 billion euros.

It issued a further 1.4 billion euros in 10-year bonds at a marginal rate of 5.564 percent. At an auction of 10-year bonds last month, the Treasury was forced to offer a cut-off yield of 7.09 percent, the first time it has had to pay above 7 percent since 1997, before the euro came into existence. Demand for this leg of the auction amounted to 3.03 billion euros.

In the final tranche of the auction, the Treasury sold 2.451 billion euros in bonds maturing in 2006 at a marginal rate of 4.866 percent, well below the 5.280 percent it offered at a tender held at the start of this month. The bid-to-cover ratio was 1.99 times.

"The Treasury once again issued more than its maximum target amid strong demand and at rates below those in the secondary market. It's a surprisingly positive outcome given the current volatility in the markets," Reuters quoted Citigroup strategist in Madrid, José Luis Martínez, as saying.

Yields of Spanish government bonds fell after the auction. As a result, the spread between the yield on the benchmark Spanish 10-year government bond and the German equivalent narrowed by 27 basis points to just below 350 basis points. Spain's risk premium hit a euro-era high of 499 basis points last month.

The outcome of the Spanish tender on Thursday contrasts with that of Italy the previous day when it was forced to offer investors 6.47 percent for five-year bonds.

"This morning's \[Thursday\] auction underscores the relative resilience of Spain's bond market amid an escalation of the euro-zone crisis," Bloomberg quoted Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, as saying. "Spain, despite its severe economic problems, is perceived as a safer credit \[bet\] relative to Italy."

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