Treasury exceeds maximum target at bond auction

The Spanish Treasury surpassed its issue target in Thursday’s bond auction as yields fell in line with the easing of Spain’s risk premium.

The debt management arm of the Economy Ministry sold a total of 4.798 billion euros in bonds, compared with an initial upper limit of 4.5 billion.

It sold 3.940 billion euros of a new benchmark three-year bond carrying a coupon of 3.75 percent at a cut-off rate of 3.919 percent. Bids for this tranche of the auction amounted to 6.132 billion euros.

It placed a further 858 million euros in 10-year bonds as the marginal yield fell to 5.700 percent from 6.706 percent at the previous tender.

“It was a positive tender, with a reduction in yields and good demand,” Reuters quoted IG Markets analyst Soledad Pellón as saying.

In early afternoon trade, the yield on the Spanish benchmark 10-year government bond was at 5.754 percent, with the risk premium at 416 basis points.

The European Central Bank has said that it will limit its purchase of sovereign debt in the secondary market to paper with a maturity of up to three years — and there was a clear concentration on shorter-dated bonds at Thursday’s auction.

However, Economy Ministry sources attributed the fact that 82 percent of the debt issued was shorter term to the desire to provide more liquidity for the new benchmark three-year bond.

The tender was held as Spanish government and Eurogroup sources said Spain was looking for a formula that would trigger ECB purchases of its bonds without resorting to a second bailout, which would be accompanied by tough conditions.

The ECB has conditioned its purchase of bonds to euro-zone members first requesting that the European Stability Mechanism (ESM) buy their debt in the primary market.

The scheme would center on Spain using what is left over from the 100 billion euros pledged by its European partners to recapitalize its banks to trigger debt purchases by the ECB.

Initial estimates from independent auditors put the amount of capital needed by the country’s banks at around 60 billion euros. However, the government is hoping that as a result of toxic assets absorbed by the bad bank it is setting up and the funds banks themselves can raise, the amount left over after recapitalization could be between 55 and 60 billion euros.

Madrid would prefer to have the remaining funds from the bank bailout in the form of a credit line, which could be used to intervene in the bond markets when needed or to guarantee new debt issued by the Treasury.

This formula would also require a formal application for assistance from the ESM, which entails more conditions. However, this could be limited to a strict calendar for implementing the spending cuts and reforms required by Spain’s European partners. A formal request to the ESM would meet the conditions set by the ECB for intervention.

The alternatives to this scheme would be to do nothing and hope conditions allow the Treasury to continue to finance itself in the market. In the case of renewed tension and a spike in the risk premium, Spain would have to ask for a second bailout that would include more funds beyond those remaining from the bank rescue package.

“We know this relaxation [in tensions] is temporary because the markets are factoring in an additional bailout for Spain,” IG Markets’ Pellón said. “If the reading is now that Spain is distancing itself from asking for this bailout, then things could get tense again very quickly.”