Spanish Bond Sale Disappoints

Yield higher, target rate low as skittish investors worry

An auction of Spanish bonds on Wednesday only made it to the low end of the country's target range, as yields rose to entice investors not yet convinced that Madrid's tough budget would cure the nation's financial woes.

Reuters reported that Spain sold 2.6 billion euros ($3.47 billion) of medium-term paper, where it had set a target range of 2.5 billion to 3.5 billion euros. Yields rose both on the new bonds and on the secondary market, and European markets were spooked by the auction results in morning trading, heading down in tandem with the euro, which neared a two-week low against the dollar, after the results were known. Even U.S. futures were down on the news before the markets' open.

Bonds set to mature in 2015 saw their yields increase to 2.890%. That’s higher than at their last sale on March 15, when they offered 2.440%. The good news is that the increase was below analysts' expectations of around 3.1%.

However, the news was not as good for the other two maturities in the auction. Bonds maturing in 2016 rose from 3.376% in an auction a month ago to 4.319%; analysts had expected an increase, but only pegged it at 3.95%. Bonds with 2020 dates, which last sold in September with yields of 5.156%, rose to 5.338%. Analysts had expected them to rise only to 5.2%.

Ten-year bonds on the secondary market rose about 25 basis points and approached 5.7%.

Nick Stamenkovic, rate strategist at RIA Capital Markets, was quoted saying, "The Spanish Treasury failed to raise the maximum amount and yields, bid-to-cover ratios are lower than the previous auctions and all in all suggests investors remain very cautious towards Spanish bonds at the moment."

They may have good cause. Spain's tough new budget will make it harder for the country to exit recession or lower its unemployment rate, the highest in the euro zone.

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