Yields Fall at Spanish and Italian Debt Auctions
Spain and Italy had successful debt auctions today that saw borrowing costs fall sharply in the first test of euro-zone bond markets in 2012.
The Spanish Treasury raised 10 billion euros, doubling its target of up to five billion as it auctioned three kinds of bonds. Yields fell by about 1 percent. The 10-year yield spread between Spanish and German bonds fell to 339 basis points from more than 354 basis points at Wednesday’s close.
Italy paid less than half what it did a month ago to sell one-year bills on Thursday. The spread between yields on Italian and German benchmark bonds fell below 500 basis points for the first time this year.The yield on 12-month bills fell to 2.735 percent, down from nearly 6 percent at a mid-December auction and the lowest level since June 2011.
On Friday, Italy will offer up to 4.75 billion euros of debt, including its three-year benchmark and two off-the-run issues.
Cheap loans from the European Central Bank provided domestic banks with nearly half a trillion euros of three-year money late last year in what has been a boon for Treasuries.
“Basically the only reason this has been taken down so well is abundant ECB liquidity and with another one coming up in February, just for now the market seems very complacent,” said Michael Leister, a strategist at DZ Bank in Frankfurt.
Banks have been able to borrow ECB money at an interest rate of just 1 percent, allowing them to buy government bonds with the same maturities from troubled euro-zone sovereigns, exploiting the sharp difference in yields to turn a fair profit.
Though French President Nicolas Sarkozy encouraged banks to use the cheap money to invest in sovereigns, analysts had not expected them to do so to such an extent.
Though the ECB’s loan program has clearly had a hand in the success of debt auctions since mid-December, Spanish local media are attributing the success of today’s auction to tough cost-cutting measures announced by new Prime Minister Mariano Rajoy.
But analysts still question how long domestic banks will be willing to hold medium- to long-term government debt without decisive action being taken to end the crisis.
Though Spain has set an ambitious deficit targets for this year, the country still faces huge challenges in meeting those targets after the government missed its 2011 cost-cutting goal and the economy sank further into recession.
On Wednesday, the Spanish treasury said it would cut net debt issuance by 26 percent in 2012. Its final 2012 budget is due to be set in March.
Experts estimate that Spain will need to raise roughly 177 billion euros gross in 2012, compared to Italy’s plan to raise 450 billion euros in gross terms, including bills and bonds.
“Compared with Italy, Spain’s funding needs this quarter look like a walk in the park. Right now, Spain is perceived as a safer credit than Italy,” said Spiro Sovereign Strategy’s Nicholas Spiro, explaining why yields on benchmark Spanish bonds fell lower today than did Italian yields.
However, “Spain is now in a more precarious position than a year ago given the scale of its budget deficit and the deteriorating economic outlook,” Spiro added. Rajoy’s new center-right government has predicted that the 2011 deficit left by the Socialists ousted in November would be much higher than expected at around 8 percent of gross domestic product.
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