Bond yields fall in auction as Treasury exceeds issue target

Spain’s borrowing costs fell at Thursday’s bond tender in line with the recent narrowing in the country’s risk premium as expectations grew that the government may seek a credit line from the European Stability Mechanism (ESM).

The Treasury sold a total 4.61 billion euros in three-, four- and 10-year bonds, slightly more than its maximum target of 4.5 billion.

The spread between the yield on the benchmark 10-year government bond and the German equivalent declined after the auction and stood at 378 basis points at midday, compared with 383 at Wednesday’s close. The risk premium had fallen sharply the previous session after Moody’s decided to maintain Spain’s sovereign credit rating at one notch above junk status, citing the likelihood of Spain requesting assistance from the ESM.

Specifically, the Treasury sold 1.513 billion euros in 10-year bonds at an average yield of 5.458 percent, down from 5.666 percent at a tender held in September. The marginal yield was 5.468 percent, the lowest level since February when injections of long-term liquidity by the European Central Bank pushed the risk premium down to around the level of 300 basis points. However, demand for the 10-year issue fell to 1.9 times the amount sold from 2.85 times in September.

The debt management arm of the Economy Ministry sold a further 1.637 billion euros in three year bonds at an average yield of 3.227 percent, down from 3.676 percent at an auction held last month. The bid-to-cover ratio increased to 2.6 times from 1.8 times. In the last tranche of the auction, the Treasury issued a further 1.464 billion euros in four-year bonds as the average yield fell to 3.977 percent from 4.603 percent. Bids exceeded the amount sold by 2.6 times, up from 1.9 times at the previous auction.

“It was a good auction with lower yields and higher bid-to-cover ratios,” Reuters quoted Cortal Consors’ analyst Estefania Ponte as saying.

"Up to Spain"

Prime Minister Mariano Rajoy has still to decide whether to seek what would most likely be a so-called precautionary line of credit from the ESM as he attends a European Council meeting in Brussels on Thursday. The Spanish leader has insisted on having guarantees about the effectiveness of asking for assistance in pushing down the country’s borrowing costs before committing himself.

Before Thursday’s meeting, German Chancellor Angela Merkel insisted that it was up to Spain to decide whether or not to knock at the ESM’s door. “The decision is entirely up to Spain if its needs help and how much more it needs [in addition to a loan to recapitalize its banks] from the ESM,” Merkel said in the Bundestag, the German lower house. “I have made this clear time and time again in all the conversations I have had with the Spanish prime minister.”

Merkel said it was up to the ESM to set the conditions imposed on any assistance to Spain.

German Finance Minister Wolfgang Schäuble has said he believes Spain does not need a second bailout, but two key German lawmakers on Wednesday said they were open to a request from Spain for help. Any bailout from the ESM to Spain would require approval of the German parliament.