Spain, France Auction $17 Bln Debt

Yields rise but both countries raise what they’d targeted.

Spain and France sold 13.05 billion euros ($17 billion) in debt, with both countries raising what they’d targeted amid rising borrowing costs.

Spain sold 2.54 billion euros of two- and 10-year securities and France raised 10.5 billion euros in debt out of an 11 billion-euro goal. The yield on the 10-year Spanish benchmark was 5.743 percent compared with 5.403 percent when it last sold it in January. France’s five-year notes had an average yield of 1.83 percent today, up from 1.78 percent on March 15.

Yields have risen as Spanish Prime Minister Mariano Rajoy struggles to meet budget deficit targets and as Socialist Francois Hollande pulls further ahead in polls in the run up to France’s April 22 presidential election. The yield on Spain’s benchmark 10-year bond has jumped about 1 percentage point since the beginning of March to above 6 percent, while the yield on the equivalent French bond has gained more than 10 basis points.

“The auctions were fine,” said Alessandro Giansanti, a senior rates strategist at ING Groep NV in Amsterdam. “However, risks remain in both countries. French risk is related to the election. A victory for Hollande will drive investors’ fear for a relaxation in the deficit tackling policy.”

The yield premium on French 10-year debt compared with German benchmark bunds widened to 137 basis points, from less than 100 basis points last month. France’s 10-year-bond yielded 3.07 percent at 2:20 p.m. in Paris.

Spanish 10-year bonds fell after the auction to yield 5.90 percent. The yield jumped above 6 percent last week, approaching levels that drove Greece, Ireland and Portugal into bailouts.

Demand for the 10-year Spanish debt at today’s auction was 2.42 times the amount sold, compared with 2.17 at the Jan. 19 sale, and the bid-to-cover for the bonds maturing in October 2014 was 3.28.

Spain has issued 43 billion euros of medium- and long-term debt in 2012, half the amount it plans to sell this year, the Economy Ministry said in an e-mail today after the auction.

Today’s sale was the first Spanish bond sale since the Treasury sold near the minimum target of three- and five-year bonds on April 4 as the effect of European Central Bank’s unlimited three-year lending to banks started to fade. Spain’s 10-year yield has climbed about 40 basis points since then.

“Expectations were centered on a good auction, and it was a mixed auction,” Peter Chatwell, a fixed income strategist at Credit Agricole SA said in a telephone interview.


Spain’s Woes

The Spanish sell-off has been triggered by Rajoy’s March 2 statement that the nation wouldn’t keep a promise to cut its deficit to 4.4 percent of gross domestic product this year and would instead post a shortfall of 5.8 percent. Under pressure from European partners, his government agreed 10 days later to cut the shortfall to 5.3 percent of GDP.

Even so, the target remains shaky and subject to doubt as the euro area’s fourth-largest economy labors under the burden of a popped real estate bubble, a recession and an unemployment rate of 23.6 percent. Both the Bank of Spain and the International Monetary Fund said this week that the government risks missing its current budget goals.

Meanwhile, France sold 3.55 billion euros of bonds maturing in September 2014, 1.73 billion euros maturing in April 2015 and 2.7 billion euros maturing in February 2017. Total demand for the bonds was 2.6 times the amount sold, an increase from last month, French debt-management body Agence France Tresor said.

In addition, France today sold 2.52 billion euros in inflation-linked securities maturing in July 2018.

French voters choose between 10 presidential candidates three days from now and face a choice between the two leading contenders in a second round scheduled for May 6. Socialist candidate Hollande has consistently led President Nicolas Sarkozy in polls for the decisive final ballot.

While Hollande has pledged to meet the deficit reduction targets put in place by the current government, his plan forecasts a balanced budget in 2017, a year after Sarkozy. He has suggested raising the minimum wage and promised to tax personal earnings of more than 1 million euros at a rate of 75 percent.

The proposals have raised concern that he may not be committed to improving France’s competitiveness.



Bloomberg News


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