Spain debt costs to stay high despite EU accord

MADRID: Spain is set to pay high premiums to sell bonds on Thursday, including one at the benchmark 10-year maturity, after an accord between European leaders on supporting periphery debt markets and struggling banks only partially reassured investors.

The 2022 bond will be only the fourth 10-year transaction Spain has offered at a primary auction since January. The Treasury will also sell bonds due in 2015 and 2016, similar in maturity to many others it has auctioned this year.

Euro zone leaders agreed last weekend to allow the bloc's EFSF and ESM bailout funds to buy bonds in secondary markets and direct recapitalise ailing banks, although details are lacking and Finnish opposition has dampened initial positive reactions.

Spain secured aid of up to 100 billion euros ($125.10 billion) for its battered banking sector last month, but concerns persist that the euro zone's fourth-biggest economy will eventually need a full sovereign bailout.

The premium investors demand to hold Spanish over German debt has nevertheless fallen back from euro-era records since last week , though its borrowing costs remain high.

"There is the feeling that as long as the EFSF and ESM is able to bail out banks, and there has been some good progress on breaking the feedback loop between sovereigns and banks, so it's just a case of implementation," Credit Agricole interest rate strategist Peter Chatwell said.

A near-1-trillion-euro blast of cheap credit from the European Central Bank in December and February to liquidity-starved banks prompted lenders to stock up on relatively high yielding government bonds.

Spanish banks raised their holdings of domestic sovereign debt to from 16.9 percent of the total in circulation in December to 29.2 percent in March.

The Spanish Treasury took advantage of the relatively lower yields at the start of the year and completed a good proportion of its 2012 gross bond issuance target in the first few months.

Madrid has already raised more than 61 percent of its 2012 gross issuance target and plans 12 more bond auctions this year from which it must raise 33.3 billion euros, or an average of just under 2.8 billion euros per auction.

On Thursday, the Treasury hopes to raise between 2 billion and 3 billion euros.

"They have to issue 3 billion, otherwise they'll get a rather negative reaction," said strategist at 4Cast Jo Tomkins, though she noted that the pressure on yields was still high as a lasting solution to the crisis remains elusive.

"Spain still can't issue anything beyond 10 years, so the same problem exists ... The Finnish opposition has just played up to broader implementation risks and the fact that political union is not really happening."

The 2015 bond was last sold on June 21 at an average yield was 5.457 percent but was yielding almost 60 basis points less than that in the secondary market on Wednesday, an indication of what Spain is likely to pay at auction.

The 2016 bond was almost unchanged from its last sale on June 7, when it yielded 5.353 percent, while the 10-year paper was trading at 6.4 percent in the secondary market on Wednesday, more than when it was last sold on June 7 at 6.044 percent.

Demand at the auction should be reinforced by almost 40 billion euros of German coupon and redemption payments this week, and by redemptions of around 20 billion euros of Spanish debt at the end of the month.

The auction may also see some support from expectations the ECB will cut interest rates from a record low 1 percent to boost the euro zone economy at its monthly meeting later on Thursday. ($1 = 0.7994 euros)

Source: http://economictimes.feedsportal.com/fy/8av2Fvy0bUPSn2gr/story01.htm

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