France and Spain sold all the bonds they wanted at auction on Thursday, though for Spain the cost was rising yields, indicating growing concerns the government will not be able to tame its deficit.
After a brief respite fuelled by a trillion euros of cash the European Central Bank (ECB) lent Europe's banks in December and February, markets are becoming nervous again about euro zone debt loads, with fears that Spain might follow Greece, Ireland and Portugal in needing a bailout from international lenders. That has put pressure on bond yields in the region, notably for Spain and Italy. The Spanish treasury said it sold 2.5 billion euros of two bonds, taking its issuance to half its gross target for the year. It received bids for 3.3 times the offer on the shorter of the two bonds, and 2.4 times the longer, both up on previous auctions, suggesting Spanish banks were making the most of the ECB's bounty.
France shifted 7.97 billion euros of medium and long-term bonds, with investors bidding for nearly three times the amount on offer, despite jitters on the secondary market before a presidential election that polls suggest will be won by Socialist Francois Hollande in the second round on May 6. Spain, which has seen debt costs jump since early March, when Prime Minister Mariano Rajoy abandoned the deficit target previously agreed with its European partners, sold 1.1 billion euros of a bond maturing October 31, 2014, at an average yield of 3.463 percent. It also tested market appetite for a longer-term benchmark bond, due January 31, 2022, selling 1.4 billion euros at a yield of 5.743 percent, up from 5.403 percent at the last primary auction in January. Yields on the 10-year bond also rose after the auction, suggesting investors remain concerned about the country's long-term fiscal sustainability. "A reasonable set of results, which will go some way to allaying fears the domestic bid for Spanish bonds has dried up. That said, as evidenced by the accepted yield on the 10-year, this support does come at a price," rate strategist at Rabobank Richard McGuire said. The yield on 10-year Spanish bonds rose briefly above 6 percent on the secondary market on Monday for the first time since the end of November, sparking concern it could soon become impossible for the government to affordably refinance itself.
France auctioned for the first time a 0.75 percent medium-term note, known as a BTAN, due in September 2014, at a yield of 0.85 percent. The yield on its 3.50 percent long-term OAT bond, which matures in April 2015, was 1.06 percent. No recent yield comparison is available for that bond. Its 1.75 percent BTAN due in February 2017 sold at an average yield of 1.83 percent, slightly up from a yield of 1.78 percent when it was last auctioned on March 15. "It went smoothly, decent demand, they've reached their target," said RIA Capital Markets strategist Nick Stamenkovic in Edinburgh. "We've seen a bit of a concession in the past few weeks as investors fret about a shift in policy under the helm of Hollande if he gets into power." France lost its triple-A rating status earlier this year.
With half its annual target raised so far this year, Spain now has some leeway to issue debt at a slower pace later in the year if borrowing costs remain high. Spain's banks, virtually closed off from international wholesale debt markets with investors spooked by the property-related assets on their books, have used large chunks of the ECB's loans to buy domestic government paper. Meanwhile, non-residents have been dumping it; investors residing outside of Spain have cut their holdings to 42 percent of the country's sovereign debt in February, down from 50 percent just two months before. Spain entered its second recession since 2009 in the first quarter after more than four years of contraction or minimal growth In the aftermath of a collapse in its property market. "The Treasury can afford to ease off the gas ... but Spain remains under the cosh and locked in a negative feedback loop," said Jo Tomkins, strategist at 4Cast.