French and Spanish Debt Auctions Bring Temporary Relief Ahead of EU Summit

Debt auctions in France and Spain attracted solid demand and at lower yields than previously feared.

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Madrid’s cost of borrowing, ranging from around 5.19 to 5.54 percent on the 4-, 5-, and 6-year paper, was the highest at a government sale since before the launch of the euro, but still far below the unsustainable 7 percent threshold.

France sold 4.35 billion euros of long-term bonds, with yields on both 10- and 15-year issues declining. The 10-year yield stood at 3.18 percent, with the premium investors charge for holding its bonds over benchmark German bunds falling 93 basis points.

“Demand is stronger than a month ago, although yields are fairly elevated. It is mildly encouraging,” said Nick Stamenkovic, bond strategist with RIA Capital Markets.

Just two weeks ago, Spain saw yields hit euro-era highs of 6.975 percent as it auctioned 10-year debt days ahead of a general election that swept a new center-right government into power.

French yields also spiked earlier this month on concern over its banks and triple-A credit rating.

Yesterday’s move by major central banks to prevent a global liquidity crunch is at least partly responsible for the decline in borrowing costs, but yields are unlikely to come down more substantially until European leaders announce a clear plan to tackle the crisis.

European leaders will meet at a summit on December 9, where Germany and France are expected to present their plans for a fiscal union.

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Most market players are hoping that the fiscal union will allow the European Central Bank to step in to backstop struggling government, though Germany continues to resist such action.

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