Spain bond sale tests demand after Irish bailout

Spain tested investor sentiment with the first debt sale since its 10-year bond yield rose to the highest in a decade following the bailout of Ireland.

Spain sold ¤2.5 billion ($3.3 billion) of three-year debt today, pricing the securities to yield 3.72 per cent, 23 basis points less than the same bonds in the market prior to the auction. Spanish bonds extended gains after the sale, and the yield premiums on Spanish, Italian and Portuguese debt over German bunds all narrowed further on the result.

“The average yield at the auction is way below secondary markets,” said Chiara Cremonesi, a London-based analyst with UniCredit. “Taking into consideration the current environment, the auction was decently received and sends a reassuring message to investors, after the recent speculation on contagion of the sovereign debt crisis to Spain.”

 

The extra yield investors demand to hold Spain’s 10-year debt over German bunds climbed to a euro-era high on November 30 as Ireland’s bailout fuelled speculation Spain or Portugal may be next to seek aid from the European Union. The spread is driving up costs for Spain just as its banks reduce bond purchases. The risk for Europe is that a rescue for Spain, an economy almost twice the combined size of Greece, Portugal and Ireland, would strain the region’s ¤750 billion bailout facility.

Investors ordered 2.27 times the amount of the bonds offered today, more than the 2.16 times at the previous auction on October 7. The yield on Spain’s three-year bond in the secondary market fell 17 basis points to 3.895, the lowest since November 24.

“With its refinancing requirement being acute early next year, it’s very important that sentiment is positive enough for Spain to access the market or the country will become a sovereign equivalent of Northern Rock,” John Anderson, the London-based head of credit at Gartmore Investment Management, said before the sale, referring to the UK bank that was nationalised in 2008.