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Spanish Bond Auction Shows Weakness

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Spain’s auction of 3-month and 6-month Treasury bills on Tuesday was a clear indicator that, Greek rescue notwithstanding, the euro zone’s debt troubles are far from over. Demand was lower than at its last regular sale in June, and yields were higher, hitting a punishing level not seen since 2008 for 3-month bills.

According to Reuters, 2.9 billion euros ($4.16 billion) of 3- and 6-month Treasury bills were sold at the auction. Madrid sold 750 million euros in 3-month bills with an average yield of 1.899%, compared with 1.568% at the last auction; the bid-to-cover ratio fell to 6.3, while in June it stood at 9.5. Its 6-month bill sales came in at 2.14 billion euros, on an average yield of 2.519%, the highest it has been since December of 2010. In June it was only 1.776%. Also, demand in June stood at 3.8 compared with this latest activity at only 2.2.

The target had been to sell between 2 billion and 3 billion euros of the two bills.

Marc Ostwald, a strategist at Monument Securities, said of the sale in the report, “The most important point again is the fact that relative to the last auction yields are much, much higher … It’s not a good situation to be in. It shows we may have had some relief last week but that relief has proven to be rather short-lived.”

However, all are not caught up in doom and gloom. Matteo Regesta, rate strategist at BNP Paribas, said that yields would most likely come down as Greece’s rescue is put into effect and the European Union (EU) rescue fund changes are implemented. In the report, he was quoted saying, “It takes time to implement [Greece's bailout], and within this period the market will try to collect some extra basis points, but as we approach the operative phase, these rates will have to decrease.”