Treasury issues five-year debt at lowest rate since 2005

The Treasury on Thursday sold five-year bonds at the lowest rate seen since 2005, reflecting the marked improvement in Spanish sovereign debt market conditions this year.

The auction was held after Moody’s Investors Services followed other ratings agencies by improving the outlook on Spain’s Baa3 sovereign debt ratio to stable from negative citing “evidence of a sustained rebalancing of the Spanish economy and improving medium-term economic prospects.”

The ratings agency also said any further recapitalization of the country’s banks would be limited and would not derail an improved outlook for Spain’s public finances.

Spain emerged from a two-year recession in the third quarter of this year when GDP was up 0.1 percent on a quarterly basis. However, the incipient recovery remains patchy. According to consultant Markit, the services sector expanded again in November but manufacturing contracted. The National Statistics Institute (INE) said Thursday that industrial production declined an annual 0.8 percent after increasing for the first time in over two years the previous month. However, the renewed fall in October was of the smallest magnitude in the past two years.

Economy Minister Luis de Guindos told state radio RNE on Thursday that although the recovery is “still fragile,” he expects a continuation of the upturn seen in the third quarter in the fourth quarter when the pace of activity might “even strengthen a little.”

The Treasury sold a total of 3.52 billion euros in four- and five-year bonds, slightly above its target and has fully covered its medium- and long-term debt issue program for the year of 121.3 billion euros.

The average yield on the five-year issue fell to 2.722 percent from 2.871 percent at an auction held last month. The yield on the four-year bond rose to 2.182 percent from 2.101 percent last month.

Demand for the four-year issued exceeded the amount sold by 3.6 times, while the bid-to-cover ratio for the five-year issue was 2.2 times.

After the auction was held, the European Central Bank opted, as expected, to keep its key intervention rate after its surprise decision the previous month to cut it to a record euro-era low of 0.25 percent from 0.50 percent previously.

Speaking after the bank’s monetary policy meeting, ECB President Mario Draghi said interest rates would remain low for as long as was needed to assist the recovery in the euro zone.

“Our monetary policy stance will remain accommodative for as long as necessary, and will thereby continue to assist the gradual economic recovery in the euro area,” Draghi said in introductory remarks at the regular news conference after the meeting. “In this context, the Governing Council confirmed its forward guidance that it continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time.”