Spain Bonds Sale Goes Smoothly

Spain sold nearly twice as many bonds than planned at its final auction this year in very strong demand, although market participants expect the country's borrowing conditions to remain tough next year.

The Spanish Treasury sold €6.028 billion ($7.83 billion) bonds, against a target range of €2.5 billion to €3.5 billion of the 3.15% January 2016, 4% April 2020 and 5.5% April 2021 bonds. It received total bids of €11.214 billion, implying a comfortable coverage of the amount sold and allowing the issuer to raise more cash than planned.

Spain's borrowing costs, however, remained elevated at the auction, even as Spanish debt has been outperforming its nearest proxy, Italy, since the end of November. Spain paid an average yield of 4.023% on the January 2016 bond versus 5.276% at its previous auction Dec. 1. The average yield on the April 2020 bond was 5.201% versus 5.006% at the previous sale Sept. 15.

The average yield at the April 2021 bond was 5.545% compared with 5.433% on Oct. 20, below secondary-market levels. Ten-year Spanish bond yields fell after the auction, trading at 5.524%, according to Tradeweb, down from 5.668% prior to the release of the results.

Analysts said the usual pre-auction cheapening of the bonds helped channel demand, and so did domestic institutional investors' purchases who need the paper as collateral for borrowing money from the central bank. Traders have noted demand for shorter-dated Spanish and Italian bonds ahead of the European Central Bank's three-year long-term refinancing operation next week.

To be sure, Spain's borrowing needs in the government bond market in 2012 are significantly below Italy's, its nearest proxy. Analysts estimate Spain's gross bond funding between €80 billion and €90 billion for 2012, compared with its targeted €94 billion bond issuance this year. In comparison, Italy's gross bond issuance in 2012 is estimated between €208 billion and €242 billion.

"Spain is better placed than Italy as it will face no big redemptions until April, when bonds for €12 billion will come due," said ING strategist Alessandro Giansanti. Italy, meanwhile, according to Citigroup's data, will have €26 billion redemptions of BTP government bonds and €10 billion coupon payments on Feb. 1.

Based on Italy's €91 billion bond redemptions between February and April, ING expects widening pressure on the spread between Italy and Spain in the first quarter.


But Spain's new centre-right government will need to act in early 2012 to bolster its austerity drive, and deepen recent reforms "to further dismantle still too-rigid labor laws, namely wage awards tied to past inflation, still-excessive severance pay for redundancies, and high costs for regulatory compliance," said Raj Badiani, economist at IHS Global Insight.

read more: Olympus Wealth Management