Spain debt sale taps keen market

REUTERS

A Spanish flag flutters in the wind near a statue of Columbus in Madrid.

Madrid - Spain saw solid demand at a long-term bond auction on Thursday, riding a wave of enthusiasm for its debt relative to Italy's that might soon ebb as investors look more closely at a gloomy economic backdrop.

At an unscheduled auction for market makers, the Treasury sold 803 million euros ($1.0 billion) of paper due 2029, 2040 and 2041 more cheaply than in recent issues of the same bonds. The shortest yield fell to 5.224 percent from 5.787 percent.

That means Spain has already reached more than 30 percent of its medium- and long-term debt target for 2013 at sharply lower costs than six months ago, when investors worried about state finances were dumping bonds from across the euro zone periphery.

Spanish yields have fallen relative to Italian debt as market concerns have grown about political deadlock in Rome following an inconclusive election two weeks ago.

But with Spain saddled with chronically high unemployment and caught in a deep recession that looks likely to continue well into 2013, that trend could soon reverse.

“There has been a numbing complacency in the markets with regard to country-specific risk across the euro zone periphery, but particularly in Spain,” said Nicholas Spiro managing director at Spiro Sovereign Strategy.

“The bleak economic data coming out of Spain and the scant prospect for meaningful growth point to an underpricing of Spanish risk.”

Spain's retail sales fell for a 31st straight month in January, data showed on Thursday, while the country's struggling banks came under more pressure from a court ruling making it slightly easier for Spanish homeowners to fight evictions.

WINDOW OF OPPORTUNITY

Last July, Spain's bond yields rose to levels not seen since the euro was introduced, with returns on 10-year paper rising above 7.6 percent - prompting expectations Madrid would be forced to seek a sovereign bailout.

Its yields have since fallen sharply on a subsequent European Central Bank pledge to support Europe's struggling debt markets, and they have stayed relatively low.

That promise also drove down Italian yields, which have consistently undercut Spanish ones during the euro zone crisis.

But Rome paid its highest three-year borrowing costs since December at an auction on Wednesday after the political paralysis triggered a credit rating downgrade last week.

Meanwhile, the yield on Spanish one-year paper fell on Tuesday at an auction to its lowest level since before Greece was forced to request its first bailout in 2010.

Madrid announced Thursday's off-calendar bond sale following Tuesday's success, an opportunistic move that might be harder to repeat in future.

“They had a window of opportunity before the Italian elections ... but we have risk aversion coming back to the market,” said Alessandro Giansanti, a rate strategist at ING in Amsterdam.

“Foreign investors will be shy to invest in long-term bonds issued by the lower-rated countries.”

Spain's gross domestic product sank for the sixth straight quarter at the end of last year and at its fastest rate since 2009 as battered domestic demand weighs heavily on an economy struggling to reinvent itself after a burst property bubble in 2008.

That market implosion came back to bite the countries' banks on Thursday, when the European Court of Justice decreed that Spanish judges should be allowed to halt evictions when homeowners contest abusive clauses.

Spain's banks, which say they have helped keep mortgage default rates at very low levels, had opposed a loosening of the rules, arguing that would make it harder for them to raise much needed funds backed by mortgages.

Government efforts to reduce one of the euro zone's highest budget deficit through tax hikes and spending cuts and record-high unemployment have added to the consumer gloom.

“(A three-percentage-point hike in value added tax) has deflated spending intentions in the closing stages of 2012 and will continue to do so throughout 2013,” analyst at IHS Global Insight Raj Badiani said.

But government officials are confident that robust export figures and improving financing conditions mean the economy will perform better than expected, predicting on Thursday that growth will return later this year and that economists will upgrade their 2013 forecasts.

The official forecast for 2013 GDP stands at a 0.5 percent contraction compared with consensus of around a 1.5 percent shrinkage. Spanish think tank Funcas reiterated on Thursday its forecast for a 1.6 percent annual fall.

The government said Thursday's bond sale had been relatively small as it was aimed at satisfying a technical demand from market makers after some maturities had become illiquid.

The yield on Spanish 10-year debt stood at around 4.8 percent on Thursday. - Reuters