Spain’s financial markets embrace ECB bond-buying program

The Spanish financial markets warmly welcomed the European Central Bank’s decision on Thursday to renew purchases of the sovereign debt of financially distressed euro-zone members such as Spain.

Spain’s risk premium eased to levels last seen in May, while the blue-chip Ibex 35 led European bourses higher despite the fact that in order to activate bond purchases by the ECB under its new Outright Monetary Transactions (OMTs) program, countries will first have to formally request assistance from one of Europe’s two rescue funds, the European Financial Stability Facility (EFSF) and its permanent successor the European Stability mechanism (ESM). ECB President Mario Draghi said “strict conditionality” would be attached to such assistance.

The new program was unveiled after the ECB’s monthly monetary policy committee meeting at which the bank decided to leave its key lending rate on hold at 0.75 percent.

The spread between the yield on the 10-year government bond and the German equivalent narrowed 46 basis points to close at 447. The Ibex 35 added 4.91 percent to 7,862.00. As major holders of Spanish sovereign debt, the banks were among the main beneficiaries of the move by the ECB. Santander put on 4.60 percent, BBVA was 5.29 percent to the good, while Sabadell climbed 6.96 percent.

Expectations for an easing of Spain’s borrowing costs provided fertile ground for a bond auction held by the Treasury prior to the ECB announcement, with the yields offered falling sharply.

Yields fell sharply at a bond auction held by the Treasury prior to the ECB announcement

The debt management arm of the Economy Ministry sold 3.5 billion euros in bonds maturing in 2014, 2015 and 2016, its maximum target for the auction.

It issued 1.39 billion euros in debt due October, 2016, with the marginal yield falling to 4.694 percent from 6.059 percent at an auction held in August. It sold a further 1.43 billion euros in three-year bonds at a cut-off rate of 3.774 percent, down from 5.197 percent in July.

In the final tranche of the auction, the Treasury sold 680 million in bonds due in April 2014 at a marginal yield of 2.946 percent, down from 4.791 percent in June.

Total demand for the three issues remained healthy at 6.467 billion euros. The bid-to-cover ratio for the 2016 bonds was 1.86 times, 1.76 times for the 2015 bonds and 2.01 times for the 2014 bonds.

The Economy Ministry said the Treasury now had 76.8 percent of its planned medium-to-long debt issues for the year covered.

“The Treasury faces the final stretch of the year in a comfortable position, without added pressure from the markets,” the ministry said in a statement.