Miles Johnson in Madrid
Spain sold 3.75bn euros of bonds in a well-supported auction that saw the eurozone?s fourth largest economy raise the maximum of its targeted proceeds, but at the same time pay the highest amount to borrow in 14 years.
Signs of resilient investor demand for the sale of three, four and five year bonds was well received by markets, indicating that sentiment towards Spain has improved after a series of dire weeks for holders of its government debt.
Selling at the top of a previously stated target range for proceeds of between 2.75bn euros and 3.75bn euros the Spanish treasury saw the average yield for 1.7bn euros of five year bonds maturing in 2017 rise to 5.544 per cent, up from 4.848 per cent in the last similar auction held earlier this month.
The bid to cover ratio for the five year bond, a measure of investor demand against the amount of debt available for sale, rose to 2.7 times, compared to 1.8 times in October.
The Spanish auction comes after a fortnight where Europe?s sovereign debt crisis has escalated, prompting Olli Rehn, EU economic and monetary affairs commissioner, this week to issue a stark warning that the eurozone had just 10 days to find a solution, or risk break up.
Conditions for the Spanish debt auction however were helped by coordinated action by the US Federal Reserve and other central banks on Thursday to ease dollar borrowing costs, thus boosting available liquidity for embattled European banks, and sending stock markets soaring.
Meanwhile, the amount of interest buyers demanded for the sale of 1.2bn euros of Spain?s three year debt rose from 3.639 per cent in an October sale to 5.187 per cent. The average yield on the 2016 bond increased to 5.276 per cent, up from 4.872 per cent in the last equivalent auction in February.
The bid to cover ratio for the 2015 bond rose from 2.1 times to 2.7 times, while the same gauge of demand for the 2016 bond increased from 1.8 times to 2.8 times.
A sale of 10 year debt two weeks ago saw Spanish borrowing costs rise to a euro-era high of 6.975 per cent, and helped further convince the country?s electorate to sweep the Socialist government that had ruled since 2004 from power in favour of the centre right Popular Party.
Investors have come to view a borrowing cost of over 7 per cent for 10 years as an inflection point that can push government?s to seek an international rescue after Greece, Portugal and Ireland were all bailed out after their bond yields breached that level.
Since Mariano Rajoy, the PP leader, won the largest parliamentary majority in over 20 years he has been criticised for failing to sufficiently outline his economic reform programme, which has helped sustain pressure on Spanish borrowing costs from worried investors.
Spain had been planning to sell up to 3.75bn euros in new three year bonds, but decided instead to split the issue up into the three separate sales of existing debt.
A separate sovereign debt auction in France also soothed nerves. Paris sold sold a total of 4.35bn euros in debt falling due between 2017 and 2041 at yields between 2.42 per cent and 3.94 per cent.
? The Financial Times Limited 2011