Spain saw solid demand for medium- and long-term bonds on Thursday, paying over 2 percentage points less to issue a 5-year bond than Italy this week, as Madrid's cost cutting helped ease concerns it was the euro zone's weakest link.
But while the Treasury also paid much less to sell two 10-year bonds than a similar issue just a month ago, yields were still near euro-era highs amid doubts over euro leaders' ability to find a lasting solution to the bloc's debt crisis.
“A good auction ... they managed to sell quite a chunk. In terms of pricing they came in substantially below secondary market levels,” strategist at West LB, Michael Leister said.
“It won't help to calm these fears everyone in the market is having about funding in 2012, but Spain is considered a far more attractive credit than Italy.”
The Treasury raised 6 billion euros ($7.77 billion) from the auction of three bonds in the primary market, far surpassing a target of 3.5 billion euros and meaning the Treasury has completed its end-of-year bond issuance goal.
Spain faces medium and long-term debt redemptions of nearly 50 billion euros of medium in 2012 though is must also finance a public deficit of around 5 percent of gross domestic product.
SOCIALISTS TROUNCED
The centre-right People's Party (PP) trounced the Socialists in November 20 election as voters punished Prime Minister Jose Luis Rodriguez Zapatero for his handling of the economic crisis though his measures have kept Spain needing a Greek-style bailout.
Incoming Prime Minister Mariano Rajoy has said he will continue with the previous government's austerity measures and cut the budget shortfall from an expected 6.5 percent of GDP this year to 4.4 percent of GDP next year.
Pollsters say Spaniards are largely resigned to the idea of more cuts, but that sentiment could fade within a year if the economy does not bounce back from a prolonged slump.
Spain's economy stagnated in the third quarter and is widely expected to sink into its second recession in three years at the start of 2012 as domestic demand shows no sign of returning and exports are hit by the global slowdown.
The auction came as markets braced for a possible ratings downgrade after a disappointing summit of European Union leaders on Friday.
Spain sold 2.5 billion euros of a bond maturing Jan. 31, 2016 at a yield of 4.023 percent, compared to 5.276 percent when it was last auctioned Dec. 1. The bond was 2 times subscribed after 2.8 two weeks ago.
The bond maturing April 30, 2020, sold 2.2 billion euros at an average yield of 5.201 percent while a bond maturing April 30, 2021 sold 1.4 billion euros for 5.545 percent.
The last time Spain ran a primary auction a 10-year bill November 17, it paid an average yield of 6.975 percent, considered by most economists as unsustainable over the long term.
However, while the benchmark 10-year yield was down from recent highs during volatile trade, it was still far above prices paid from the average yields seen before June.
“These are still high levels of rates but they are a lot better than Italy's ones,” strategist at Monument Securities Marc Ostwald said. - Reuters