Spain breezes through first debt auction of the year

Treasury issues 10 billion euros in bonds at much lower rates thanks to ECB injection into banking system

The Spanish Treasury's first debt auction of the year on Thursday attracted strong demand, with borrowing costs pushed sharply lower.

The government's debt management agency issued almost 10 billion euros in three- and four-year bonds, double the target amount of five billion. That would seem to indicate the Treasury wants to take advantage of the more favorable current funding environment to cover as much of the country's borrowing needs as soon as possible.

Thursday's auction was also the first since the new Popular Party (PP) government took power at the end of last year. The PP's first major policy initiative was to announce tax hikes and spending cuts worth some 15 billion euros to help cover a two-percentage point overshoot on the budget-deficit target for last year of 6 percent of GDP.

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The outcome of the tender pushed Spain's risk premium down by 14 basis points. The spread between the yield on the benchmark Spanish 10-year government bond and the German equivalent eventually closed down 21 basis points at 329.

The Treasury placed 4.271 billion in three-year bonds at a cut-off rate of 3.576 percent, down from 4.058 percent at the previous three-year auction held on December 15. Demand for this leg of the auction amounted to 7.677 billion euros.

It sold a further 2.503 billion euros worth of bonds maturing on April 16 as the marginal rate eased to 3.883 percent from 4.885 percent at the previous auction. Demand came to 5.532 billion euros.

The last leg of the auction was for bonds maturing in October 2016. Here, the Treasury awarded 3.211 billion euros out of bids worth 5.532 billion as the cut-off rate fell to 3.949 percent from 4.891 percent.

Total demand for all three issues amounted to 18.701 billion euros, almost twice the amount sold. Interest was spurred by the European Central Bank's injection of 500 billion euros in long-term loans into the euro-zone banking system at the end of last year at a borrowing rate of one percent.

"A robust set of results that will likely underpin speculation that the ECB's backdoor financing of peripheral sovereigns via the long-term refinancing operations will prove effective," Bloomberg quoted Richard McGuire, a senior fixed income strategist at Rabobank International in London, as saying.

That may boost appetite for risk and narrow the gap between borrowing costs in Europe's periphery and Germany, McGuire added.

The Treasury announced on Wednesday that it plans net debt issues this year of 36 billion euros to cover the government's deficit target for this year of 4.4 percent of GDP. It faces maturities of 50 billion euros in medium- and long-term debt this year and will also roll over 80 billion euros in Treasury bills.

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