Spain saw a steep decline in borrowing costs at an auction on Tuesday amid speculation that the European Central Bank would resume its purchase of peripheral bonds.
Further, markets are also hopeful that a series of bilateral meetings between key Eurozone leaders may produce a lasting solution to the region's prolonged sovereign debt crisis.
Despite the easing borrowing costs, the Spanish bond yields are uncomfortably high as uncertainty prevails over the need for the country to seek a full-blown bailout for its economy.
The Spanish Treasury managed to sell slightly more debt than it had planned in Tuesday's auction. The agency raised a total EUR 4.51 billion from the sale of 12 and 18 - month bills against a target of EUR 3.5 billion - EUR 4.5 billion.
The yield on the one-year debt declined to 3.070 percent from 3.918 percent in the previous sale on July 17. The 18-month paper was placed to yield 3.335 percent, which was less than the 4.242 percent fetched in July.
The bid-to-cover ratio, which reflects investor demand, dropped to 1.91 from 2.23 in the 12-month debt sale. Demand was the longer-term paper was 3.98 times the offer, slightly better than 3.66 times seen last month.
The ECB is considering setting limits on yields of Eurozone sovereign bonds, Germany's Der Spiegel magazine reported over the weekend. According to the magazine, the central bank will intervene and buy the bonds if their interest rates exceed a pre-determined threshold above German bonds.
The report helped to push top European shares higher by mid-morning on Monday. Also, Spanish and Italian 10-year bond yields declined notably yesterday.
However, the ECB reportedly rejected such speculation. The central bank said reports about the plan to cap borrowing costs is misleading. Such a decision has not yet been taken, it added.
Meanwhile, Germany has stuck to its opposing view and Bundesbank reiterated its opposition to the ECB's plan to purchase government bonds on Monday. The decision to share solvency risks should be taken by governments, and not by central banks, Bundesbank said in its latest monthly report.
The ECB is widely expected to reveal any detail of its bond purchase plan on September 6, when it holds its next rate-setting session. On the same day, Spain will enter the market aiming to sell its longer-term bonds.
Spain has repeatedly asked the ECB to resume its bond purchase program to reduce high borrowing costs faced by country. Most recently, Spanish Economy Minister Luis de Guindos called for unlimited bond buying by ECB on the secondary market, in an interview to the Spanish news agency Efe.
Elsewhere, key Eurozone leaders are preparing for a series of meetings starting tomorrow in their quest for a credible solution for the debt crisis. Greek Prime Minister Antonis Samaras is expected to meet some of the leaders of the currency bloc this week to request an extension of its fiscal consolidation program.
Eurogroup Chairman Jean-Claude Juncker will meet Samaras on Wednesday. The Greece Premier will then travel to Berlin on Friday to meet German Chancellor Angela Merkel. He will also hold talks with French President Francois Hollande this week.
Yesterday, European Central Bank Executive Board member Joerg Asmussen said a Greek exit from the euro area would be manageable, but would be expensive.
by RTT Staff Writer
For comments and feedback: firstname.lastname@example.org