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Subdued Spain bond sale puts aid debate back in focus
Spain auctioned fewer bonds than it hoped to on Wednesday, prompting markets to ditch the country's debt as investors fret over the timing of an expected aid request by the government.
Yields fell from previous sales, reflecting a recent rally in prices since the European Central Bank promised in September to support heavily indebted euro zone countries, including Spain, with unlimited bond purchases if they applied for help.
But the Treasury, which faces a heavy debt schedule in 2013, missed the top end of its 3.5 billion to 4.5 billion euro target range, selling 4.3 billion euros ($5.6 billion) of bonds.
"A bit disappointing that they didn't manage to raise the full amount," said Nick Stamenkovic, strategist at RIA Capital Markets.
"The sheer scale of issuance next year and the lack of demand from domestic investors suggest to me that it's just a matter of time before Spain has to make an official bailout (request), but that's a story for early 2013," he said.
Wednesday's auction yield on the 10-year benchmark fell to 5.290 percent, down from 5.458 percent at the last auction and well below highs of more than 7 percent reached over the summer before the ECB's bond initiative took some of the heat out of the euro zone crisis.
But in Madrid's broader battle to rebalance its economy and get its debt down, borrowing costs remain uncomfortably high for a country facing another year without economic growth.
Hit by an economic slump that has left one in four out of work as well as overspending by regional and central government, Spain is likely to overshoot its 2012 deficit target.
Its manufacturing base also continues to shrink, with separate data on Wednesday showing factory activity shrank for the 19th month running in November and industrial output fell 3.3 percent year-on-year in October.
Sign of Weakness
The 10-year yield offered little or no premium to the rate at which banks were trading the paper ahead of the sale - a sign of a weak result.
The Treasury also sold a bond maturing October 31, 2015 at a lower yield than the previous auction while another due July 30, 2019, at a higher yield than at a previous auction of the same paper in January.
In the secondary market, ten-year Spanish yields extended their rise and German Bunds reversed losses after the results, indicating the market's disappointment.
Spain's auction contrasted with strong demand at a 3.3 billion euro auction of two-year German bonds, which sold at negative yields.
Concerns over U.S. lawmakers' ability to reach a deal to avert a fiscal crisis early next year has buoyed safe-haven assets recently even as sentiment towards riskier euro zone debt improved.
"Fundamentals haven't changed for the Schatz. There's still demand for high quality collateral," Artis Frankovics, rate strategist at Nomura said.
Spain's risk premium over Germany rose to 400 basis points after the sale, up 10 basis points from before the auction but still below highs of over 650 bps hit in July.
Spain's bond sale was its second to last of 2012 and should mean it has covered all of its financial needs for this year. After covering redemptions, the Treasury has additional funds of almost 44 billion euros, according to government data.
"There's still a somewhat Teflon-like feel to Spain's bond market despite the fact that demand at today's auction - a fairly modestly sized one at that - was not as strong as expected," said Nicholas Spiro of Spiro Sovereign Strategy in London.
"Still, the lower yield on the 10-year note is a further illustration of the enduring signaling effect of the ECB's bond-buying programme. The very fact that Spain is, at least on paper, pre-funding for next year and selling 10-year paper at 5.3 percent is quite an achievement considering how dire things looked as recently as July."
[Source: By Paul Day, Reuters, Madrid, 05Dec12]
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