Spanish risk premium leaps after record interest paid at bond auction

Investors increasingly wary despite revelation that Madrid can use part of bank rescue fund to buy up debt in the secondary market

Spain’s risk premium jumped on Thursday after the Treasury was forced to pay the highest yields on government bonds at a debt auction since the euro came into existence.

The yield on the benchmark 10-year government bond was trading at over seven percent, which pushed the spread with the German equivalent after the tender to over 580 basis points, just short of a euro-era high of 589 basis points reached on June 18. The premium ended the day at 579 basis points, a record high for the close.

The Treasury sold 1.074 billion euros in five-year bonds at a marginal rate of 6.543 percent, up from 6.195 percent at a tender held last month, and also the highest yield paid since 1995. It issued a further 547 million euros in bonds maturing in 2019 at 6.798 percent, up from 6.195 percent for bonds of similar maturity sold in February. In the last leg of the auction, it sold 1.359 billion euros in two-year bonds at a cut-off rate of 5.302 percent, up from 4.483 percent previously and the highest yield paid for two-year paper since the Treasury starting compiling figures in 1988.

The total amount issued fell 18 million euros short of the Treasury maximum target of three billion, while demand for the bonds fell. The bid-to-cover ratio for the two-year issue dropped to 1.9 times from 4.26 times last month, while demand for the five-year issue exceeded the amount sold by 2.06 times, down from 3.44 times in June.

It wasn’t a catastrophe, but it is an indication that the situation is delicate"

The bond tender was the first held after the Cabinet approved tax hikes and spending cuts worth 65 billion euros, the biggest austerity drive since Spain returned to democracy over 30 years ago.

“It wasn’t a catastrophe, but it is an indication that the situation is delicate, that it is going to be difficult to place long-term debt, and that this situation cannot carry on indefinitely,” Reuters quoted Nicolás López of brokerage M&G Valores, as saying. “The yields were somewhat higher than those in the secondary market, but that’s normal given non-resident investors are not there and the Spanish banks are limited in their ability to absorb debt,” he added.

The central government has now covered 65.2 percent of its medium-to-long term funding needs for the year. The average yield on debt issued up to the end of June was 3.37 percent, compared with 3.90 percent last year.

The spike in the risk premium took place despite the fact it has emerged that the government will be allowed to use part of the up to 100 billion euros in rescue funds for its banks approved by the Eurogroup to buy Spanish government bonds in the secondary market.


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