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Relief after strong Spanish bond auction

Thursday, March 07 11:58:44

Spain hit the top end of its targeted amount at a bond sale today, with demand underpinned by tacit support for its debt programme from Europe's central bank as it distanced itself from political uncertainty in Italy.

The Treasury in Madrid sold 5 billion euros ($6.5 billion) at the auction of bonds due in 2015, 2018 and 2023, with demand solid for all three maturities and the yield on the 10-year benchmark dropping back below 5 percent, down significantly from the previous sale two weeks ago.

"A year ago, Spain would have never been able to sell 10-year paper at a sub-5 percent yield just days after an inconclusive Italian election," said Managing Director at Spiro Sovereign Strategy, Nicholas Spiro.

"Today's Spanish bond sale says much about the sea-change in market sentiment towards the euro zone."

Italian political groups are struggling to form a government more than a week after an election in which voters rejected austerity programmes, casting doubt on the country's commitment to Europe's catch-all formula for tackling the debt crisis.

Spain's struggle with one of the highest public deficits in the euro zone, a deep recession and massive unemployment pushed the country's debt premiums to 12-year highs last year.

But its yields have come down as investors search for better returns, and since the European Central Bank pledged last September to support - in exchange for policy commitments - the debt of struggling euro zone states that ask for aid.

Markets welcomed confirmation last week that Spain had hit its 2012 public deficit target of 6.7 percent of gross domestic product.

Alessandro Giansanti, strategist at ING in Amsterdam, said good news from the government on the deficit was "creating a positive mood among investors, especially foreign investors."

Spain's yields rose briefly after the vote in Italy but have since come down as the perception of risk contagion recedes. Reuters