Yields fall at Spain’s first debt tender after ECB rescue plan

Yields fell to levels last seen in April at Tuesday’s T-bill tender, the first auction of Spanish public debt since the European Central Bank unveiled its plans to ease the pressure on financially stressed euro-zone countries.

The Treasury sold 4.6 billion euros in 12- and 18-month paper, slightly more than its maximum target of 4.5 billion. It placed 3.557 billion euros in 12-month bills at a marginal rate of 2.978 percent, down from 3.207 percent at a tender held on August 21. It issued a further 1.019 billion euros in 18-month paper as the cut-off rate declined to 3.150 percent from 3.450 percent.

The bid-to-cover ratio for the 12-month issue fell to 2.8 times from three at the previous auction and to three times from 3.3 times in the case of the 18-month bills.

The market’s focus now turns to the tender of three- and 10-year bonds due to be held on Thursday, which is expected to be a better gauge of the level of confidence investors have in the government’s ability to service its debt.

The ECB’s offer to buy in the secondary market the sovereign debt of euro-zone countries — if they first ask one of the European rescue funds to buy their bonds in the primary market — has taken a lot of pressure off Spain’s risk premium.

The ECB plan will come to nothing unless Spain or Italy ask for EU/IMF endorsement of an economic program”

The spread between the yield on the 10-year government bond and the German equivalent has lessened considerably to around 430 basis points after hitting a euro-era high of almost 650 in July. However, pressure has been building on Rajoy to seek a rescue package before other events occur that could spark renewed tensions in the debt markets.

Charles Dallara, the managing director of the Washington-based Institute of International Finance (IIF), which represents the private sector in debt talks with Greece, urged countries in difficulties not to snub the lifeline offered by the ECB.

“The announcement by the ECB was very bold on the one hand, but it will come to naught, nothing, unless Spain or Italy ask for EU/IMF endorsement of an economic program,” Dallara said.

“In the absence of a governmental negotiation of a reform program that is endorsed by the European Commission, the massive potential support by the ECB will remain just potential and will not materialize,” he said.

However, the Rajoy government on Tuesday said it needed more time to weigh up the pros and cons of a second bailout on top of the one to recapitalize its banks. Spain is concerned that another rescue package could be accompanied by further conditions that are politically unpalatable.

“You have to have a very clear and deep understanding of which each thing means, and when you have that [...] to make the best decision for all Spaniards,” Deputy Prime Minister Soraya Sáenz de Santamaría said in an interview Tuesday with Spanish television channel Telecinco.