Spain's borrowing costs declined on Tuesday in the first debt auction since the European Central Bank announced plans to buy peripheral bonds earlier this month.
Despite the favorable auction results, Spanish bond yields remain high, given the lingering uncertainty as to whether the country would seek a bailout, paving way for the ECB to keep the Spanish yields lower by buying the country's bonds.
The Spanish Treasury today sold EUR 4.6 billion of 12- and 18-month bills, which was slightly above the maximum target of EUR 4.5 billion set for the sale.
The country is set to face a tougher challenge on Thursday, when it auctions a benchmark 10-year bond and a new three-year bond. The treasury aims to raise between EUR 3.5 billion and EUR 4.5 billion.
The Spanish government is still studying the conditions of a possible EU bailout, Deputy Prime Minister Soraya Saenz said in an interview on Tuesday. The government is trying to minimize the impact of austerity measures on the population, she noted.
Pressure is building on the embattled euro area member to seek a bailout. Spain's 10-year yield moved above 6 percent this week. Spanish bank bad loans rose to a record high of 9.86 percent in July, the Bank of Spain said today.
ECB Governing Council Member Luc Coene warned on Monday that rising bond yields may force Spain to place a bailout request.
"If the markets see that Spain is not going to" ask for financial assistance, "it will not be long before spreads will rise again and Spain will be forced to come back" on its decision to request bailout and submit to ECB conditions, the policymaker said.
The country today sold EUR 3.6 billion of the one-year paper to yield 2.835 percent, which was less than 3.070 percent paid at the previous auction on August 21. The bid-to-cover ratio, which reflects investor demand, rose to 2.03 from 1.91.
The treasury also raised nearly EUR 1 billion by selling 18-month bills at yield 3.072 percent, down from 3.335 percent in the previous sale on August 21. Demand was 3.56 times the offer, which was smaller than 3.98 times last month.
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