Treasury cashes in on market truce by issuing 5.775 billion euros in bills

The Spanish Treasury took advantage of improved market conditions to overshoot its maximum issue target at Tuesday’s bill auction as its borrowing costs fell.

The debt management arm of the Economy Ministry sold 5.775 billion euros in 12- and 18-month bills, some 250 million more than the goal it had set itself of 5.5 billion.

It placed 3.246 billion euros in one-year paper at a cut-off rate of 1.52 percent. That was the lowest yield since March and well below the 2.65 percent it was obliged to offer at a tender held in December.

It sold a further 2.509 billion euros in 18-month bills as the marginal yield declined from 2.88 percent to 1.79 percent, which was also the lowest yield for paper of this maturity in 10 months. That was the last 18-month auction to be held this year, with the Treasury opting to sell nine-month bills instead.

Investor demand remained healthy. The bid-to-cover ratio for the 12-month issue was 2.21 times, while the amount of 18-month bills sold exceeded bids by 2.71 times.

It was a very good auction, in line with what we expected, with the Treasury taking advantage of the window of liquidity that has opened out for Spain,” Reuters quoted IG strategist Daniel Pingarrón as saying. “The 12-month bills were placed at half the rate of inflation, which means that (…) the Treasury is paying negative rates, giving the sensation of normality and an absence of panic.”

The secretary of state for the economy, Fernando Jiménez Latorre, said he expects the favorable trend to continue at coming auctions. The Treasury is due to sell two-, five- and 28-year bonds at an auction set for Thursday.

“The markets are positively evaluating the adjustments that are being made, and are factoring in the foundations for a recovery,” Latorre said. “As a result, we expect that this stable situation in the markets will be the tone of the coming months.”

Spain’s risk premium is currently at levels well below the euro-era record highs of around 650 basis points in July, with the improvement due to European Central Bank President Mario Draghi’s pledge to do everything within his powers to safeguard the euro.

Draghi subsequently unveiled a so-called Outright Market Transactions (OMT) program under which the ECB will buy sovereign debt in the secondary market. However, in order to trigger this, euro-zone countries must first seek assistance from the European Stability Mechanism (ESM), an option Prime Minister Mariano Rajoy has been able to eschew so far because of the easing of tensions in the debt markets.