Spanish borrowing costs continued to rise on Tuesday as the country paid higher yields at a treasury bill auction on Tuesday despite strong demand. Though the recent spike in Spanish bond yields has raised the specter of a potential bailout, the mixed reaction to today's bill auction was perceived positively by the markets.
The Treasury raised EUR 3.18 billion from the sale of 12- and 18-month treasury bills. The agency was planning to raise between EUR 2 billion and EUR 3 billion.
The yield on the 12-month paper rose to 2.623 percent from 1.418 percent at the previous sale on March 20. The bid-to-cover ratio, however, rose to 2.9 from 2.14.
The 18-month bill was placed at a yield of 3.110 percent, up from 1.711 percent at the previous sale in March. Demand was 3.77 time the offer, better than the 2.88 percent in the last auction.
The agency is set to face a bigger challenge of selling 2- and 10-year bonds on April 19.
Spain's ten-year borrowing costs surged above 6 percent yesterday for the first time in four months, worsening concerns over contagion risk of the sovereign debt crisis and the health of the economy. The cost of insuring Spain's debt hit a record high with the five-year credit default swaps reportedly rising above 510 basis points.
The surge in Spanish borrowing costs led to expectations of some kind of a bailout for the embattled euro area nation as analysts fear that the government may not be able to overcome its problems on its own despite introducing several tough austerity measures.
The 10-year yield rose to 6.15 percent on Monday, the highest level since December 2011. Borrowing costs near 7 percent are seen unsustainable and in the past, countries were forced to seek a bailout. Eurozone members Portugal and Ireland were prompted to seek bailouts after their bond yields crossed the crucial 7 percent mark.
Italian bond yield also moved higher yesterday driven by the concerns over Spain. Meanwhile, the yield on the German 10-year bund hit a record low 1.628 percent as investors flocked to safe haven debt.
There are calls for the European Central Bank to intervene by buying Spanish bonds. Recently, ECB Executive Board Member Benoit Coeure raised market expectations for another bond-purchase program by the central bank.
Coeure urged governments to build on the steps already taken to restore sound fiscal positions and support long term growth in a speech delivered on April 11. The ECB will do whatever it takes to fulfill its mandate of delivering price stability over the medium term, he said.
But another ECB Board member Klaus Knot said last Friday that there was hardly any reason to restart the ECB's bond purchases.
Last week, Bank of Spain data showed that Spanish banks stepped up their ECB borrowings after the euro area's central bank injected EUR 529.53 billion in three-year loans on February 29, which was the second offering of long term funds. The first three-year long term re-financing operation was held in December.
In the February LTRO, 800 banks tapped the cheap ECB funds and the move helped reduce yields on Italian and Spanish bonds as investor confidence improved. However, it is believed that the effects of the LTRO has started to wear off now.
by RTT Staff Writer
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