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Spain Debt Auction Successful, Yields Remain Higher


Spain saw strong demand for its debt during an auction on Thursday, but borrowing costs continued to rise amid increasing concerns that the country may be forced to seek a bailout.

The Spanish Treasury sold EUR 2.54 billion of 2 and 10-year bonds, slightly exceeding the EUR 2.50 billion maximum target set for the sale.

The yield on the 10-year benchmark bond rose to 5.743 percent from 5.403 percent in the previous auction in January. The bid-to-cover ratio increased to 2.42 from 2.17.

At the start of the week, Spain's ten-year borrowing costs surged above 6 percent for the first time in four months, on 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.

Data released by the Bank of Spain yesterday showed that bad loans reached an 18-year high in February.

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.

Spain paid 3.463 percent yield for two-year funds today. Demand for the October 2014 debt was 3.28 times the amount on offer.

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.

But another ECB Board member Klaus Knot said last Friday that there was hardly any reason to restart the ECB's bond purchases.

Meanwhile, the yield on German debt has been hitting new lows as investors flock to the perceived safe haven. The country's two-year borrowing costs fell to a record low yesterday, while the yield on the 10-year bond hit an all-time low on Monday.

Elsewhere today, France also held a successful debt auction. There was strong demand for the French debt, but the country's five-year borrowing costs increased.

The Agence France Tresor raised EUR 7.973 billion from the sale of its medium-term debt, which was close to the maximum target of EUR 8 billion set for sale.

The yield on the February 2017 treasury notes, known as BTANs, rose to 1.83 percent from 1.78 percent in the previous sale in March. The bid-to-cover ratio rose to 2.69 from 1.98.

The agency placed the 2-year BTAN at 0.85 percent yield. Demand was 2.29 times the offer. The April 2015 bond was sold at 1.06 percent. And the demand was three times the amount offered.

France is set to hold its first round of presidential polls on April 22, and the second round is scheduled for May 6. Socialist Francois Hollande is expected to beat the conservative President Nicolas Sarkozy in the race.

by RTTNews Staff Writer

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