Spain paid a hefty premium to sell its short-term debt on Tuesday as investors remained worried that the country is on the brink of seeking a full-blown bailout.
Meanwhile, the safe haven appeal of German and Dutch debt suffered a blow after Moody's downgraded the outlook of the triple A rated sovereigns, pushing the countries' 10-year yields higher. Italy also saw its benchmark yield climb.
The Spanish Treasury raised EUR 3.05 billion from the sale of its 3- and 6-month treasury bills, which was slightly more than the EUR 2 billion - EUR 3 billion target.
The agency sold EUR 1.63 billion of the 3-month bill to yield 2.434 percent, which is higher that the 2.362 percent paid in the previous auction on June 26. The bid-to-cover ratio, which reflects demand, rose to 2.94 from 2.60.
The country placed EUR 1.42 billion of its 6-month paper at yield 3.691 percent, up from 3.237 percent in the previous sale on June 26. Demand was 3 times the offer, better than 2.82 times last month.
Elsewhere, the Netherlands sold EUR 1.76 billion from the sale of its two bonds maturing in July 2014 and January 2028. The Dutch State Treasury Agency raised EUR 875 million by placing the 2-year bond to yield 0.003 percent, which was lower than 0.523 percent paid on April 24.
The agency sold EUR 885 million of the longer-term bond, which was placed at yield 2.181 percent, down from 3.554 percent fetched in the previous auction on July 26 last year.
European markets have witnessed heightened volatility since yesterday after media reports over the weekend said at least six of the 17 Spanish regions are likely to seek financial assistance from the government. Spain and Italy were forced to ban short-selling in stocks following extreme market turbulence.
Spain's struggle saw its 10-year bond yield reach a euro-era high of near 7.6 percent on Monday and has stayed near that level today. Further, the Spanish five-year yield climbed above the benchmark 10-year yield in the secondary market today, for the first time since the creation of the euro.
The cost to insure Spanish debt against default also jumped to a record high yesterday. Consequently, clearing house LCH Clearnet hiked the margin requirements for Spanish and Italian bonds on Monday.
Spain has seen no respite from surging borrowing costs even after Eurozone finance ministers formally approved the EUR 100 billion bailout package for its banking system last Friday. The little relief found after Prime Minister Mariano Rajoy unveiled a EUR 65 billion austerity package on July 11 proved to be short-lived.
The latest string of negative news has fueled concerns that the country may be forced to seek an international bailout for its entire economy. The Spanish economy sunk deeper into recession with a 0.4 percent contraction in the second quarter, the Bank of Spain said yesterday.
Last week, the Spanish government cut its economic forecast and sees the recession extending into next year. The government now expects the economy to shrink 0.5 percent in 2013.
As the crisis takes a new turn to worse each day, Moody's Investors Service warned Germany, the Netherlands, and Luxembourg late Monday that they may lose their coveted triple-A credit ratings due to intensified uncertainty regarding the outcome of the debt crisis.
Moody's said the risk of a Greek exit from the euro area has increased relative to its expectations earlier this year. A Greek exit from the monetary union would pose a material threat to the euro, it warned.
The troika - the European Commission, the European Central Bank and the IMF - is visiting Athens on Tuesday. The German magazine Der Spiegel reported on Sunday that the IMF is unlikely to give any further aid to Greece.
by RTT Staff Writer
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