Spain's cost of borrowing soared, while French yields declined at separate auctions on Thursday as investors dumped the peripheral nation's debt in their flight to the perceived safety of the French debt.
The Spanish auction also revealed poor demand for the embattled country's debt, suggesting that the respite provided by the government's latest round of austerity measures is short-lived.
The Spanish Treasury raised a total EUR 2.98 billion from the sale of its 2-, 5-, and 7-year bonds, against a target of EUR 2 billion - EUR 3 billion. The Spanish benchmark 10-year bond yield jumped above 7 percent following the auction.
Elsewhere, France sold EUR 8.96 billion of 3-, 4-, and 5-year treasury notes, near the top end of its EUR 8 billion to EUR 9 billion target. The yield on all the securities on offer declined, with the five-year paper fetching a record low 0.86 percent.
Spain sold EUR 1.40 billion of October 2014 bond to yield 5.204 percent, which was higher than 4.335 percent paid at the previous sale on June 7. The bid-to-cover ratio that reflects demand plunged to 1.90 from 4.26. The security carries a coupon of 3.30 percent.
The agency raised EUR 1.1 billion from the sale of 5.50 percent July 2017 bond. The yield jumped to 6.459 percent from 6.072 percent paid at the previous sale on June 21. Demand was 2.06 times the offer, down from 3.44 times last month.
A bond due October 2019 was placed to yield 6.701 percent, which is higher than 4.832 percent paid at the previous sale on February 16. Investors bid 2.9 times for this debt, which was down from 3.3 times in February. The country sold EUR 548 million of this bond which has a 4.30 percent coupon.
Prime Minister Mariano Rajoy unveiled a EUR 65 billion austerity package on July 11, just days after the EU postponed Spain's deadline to meet the target by an year.
In the first auction since the announcement, Spain saw lower cost of borrowing for one-year funds, but the yield remained high. The country sold its 12-month treasury bill at 3.918 percent yield at Tuesday's sale.
Thus far, Spain has sought aid only to prop up its ailing banking system. The country's borrowing costs had crossed 7 percent earlier this month on worries that it may be forced to seek a bailout for its entire economy.
Previously, Ireland, Greece and Portugal were forced to seek bailouts after borrowing costs crossed this threshold.
The Eurogroup extended the deadline for bringing Spain's deficit to 3 percent of GDP by one year to 2014 and also relaxed the target for this year to 6.3 percent of GDP. Leaders have recommended the headline targets of 4.5 percent of GDP for 2013 and 2.8 percent for 2014.
Eurozone finance ministers are set to meet on July 20 to finalize the EUR 100 billion Spanish bank bailout deal struck last month. On July 9, the ministers agreed to make available up to EUR 30 billion by the end of this month.
The country's efforts to achieve budget targets are weighed down by a deepening recession. The new austerity measures pose the risk of further worsening the economic situation.
The Bank of Spain has said that the recession may have worsened in the second quarter. Gross domestic product shrunk 0.3 percent in the first three months of the year.
The International Monetary Fund slashed Spain's economic outlook for next year on Monday. The Washington-based lender now sees a 0.6 percent contraction versus the 0.1 percent growth expected in April. But, the 2012 projection was upwardly revised to show a 1.5 percent contraction this year compared to the 1.9 percent contraction expected earlier.
by RTT Staff Writer
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