Spanish notes led losses in European sovereign debt markets after demand fell and borrowing costs rose in the nation's first auctions since announcing that public debt will surge to a record this year.

The declines pushed the yield on Spanish five-year notes to the highest in 12 weeks, while similar-maturity Italian debt slid and Greek bonds fell. Benchmark German bunds rose as the nation sold securities due in February 2017. The European Central Bank held its main refinancing rate at a record low 1 percent, in line with the forecast of all 57 economists in a Bloomberg News survey.

“The auction reflects market disappointment with recent fiscal policy” in Spain, Luca Jellinek, head of European interest-rate strategy at Credit Agricole Corporate & Investment Bank in London, wrote in an e-mailed report. “The immediate post-auction price action is bearish. This kind of price action in the periphery is clearly supportive for German bunds.”

Spain's five-year note yield climbed 23 basis points, or 0.23 percentage point, to 4.49 percent at 12:46 p.m. London time. It reached 4.55 percent, the highest since Jan. 10. The 4.25 percent security due October 2016 fell 0.945, or 9.45 euros per 1,000-euro ($1,315) face amount, to 98.99.

Credit-default swaps insuring Spanish bonds jumped 18 basis points to 457, the highest since Nov. 28.

The nation sold a total of 2.59 billion euros of bonds, the Bank of Spain said today, compared with a maximum target of 3.5 billion euros.

It auctioned 973 million euros of the five-year notes at an average yield of 4.32 percent. Investors bid for 2.46 times the amount of debt allotted, compared with a bid-to-cover ratio of 2.59 at the previous auction of the securities on March 1, which were sold to yield 3.38 percent. Spain also sold notes due in January 2015 and October 2020.

Volatility in Spanish government debt was the highest in euro-area markets today, followed by Italy, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps.

Italy's five-year note yield climbed 16 basis points to 4.50 percent. Greek notes due in February 2023 fell, with the yield jumping 72 basis points to 22.01 percent. Germany's 10-year bund yield slid two basis points to 1.79 percent, after earlier reaching 1.87 percent.

'Extreme Difficulty'

Today's Spanish sale is the first since Budget Minister Cristobal Montoro presented the government 2012 spending plan on March 30 and said public debt will rise to 79.8 percent of gross domestic product.

Prime Minister Mariano Rajoy told a party meeting in Malaga, Spain today that the nation's economic situation is of “extreme difficulty,” with some public institutions locked out of capital markets, preventing them from refinancing their debt. Spain can recover if it takes the right measures, Rajoy said.

The nation's 10-year yield dropped in December and January, reaching a 16-month low of 4.83 percent on March 1, as the ECB offered unlimited three-year loans to the region's financial institutions through its so-called longer-term refinancing operations.

ECB President Mario Draghi will hold a press conference at 2.30 p.m. in Frankfurt to explain today's interest-rate decision.

“The focus will once again be on Draghi's press conference as the market tries to glean the ECB's assessment of its two longer-term refinancing operations,” Richard McGuire, a senior fixed-income strategist at Rabobank International in London, said before the announcement.

The 10-year Spanish rate rose the most since Jan. 20, climbing 22 basis points to 5.67 percent. The extra yield investors demand to hold the securities instead of bunds jumped to as high as 393 basis points, the widest since Dec. 12.

Germany sold 3.37 billion euros of notes due February 2017 at an average yield of 0.80 percent. Investors bid for 1.8 times the amount of securities allotted. A previous auction of the same securities held March 7 also garnered a bid-to-cover of 1.8 times and an average yield of 0.79 percent.

The nation's five-year rate fell two basis points to 0.78 percent, with the two-year yield slipping one basis point to 0.19 percent.

Portuguese Notes

The German two-year yield is consolidating below its 100- day moving average at 0.242 percent, according to data compiled by Bloomberg. It may find support at the March 13 rate of 0.19 percent, with resistance at the February high of 0.289 percent.

A resistance level is an area on a chart where analysts anticipate orders to sell a currency to be grouped and a support level is an area where they anticipate buy orders to be clustered.

Portuguese two-year notes fell for a fifth day, pushing the yield five basis points higher to 10.03 percent.

Portugal's government debt agency sold 1 billion euros of 18-month bills due in October 2013 at a yield of 4.54 percent. Investors bid for 2.6 times the amount of debt allotted.

The debt agency also auctioned 500 million euros of six- month bills due in October 2012 at a yield of 2.90 percent. That's down from 4.33 percent at a previous sale of similar- maturity securities on Feb. 15.

German bunds have returned 0.2 percent in 2012, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish debt gained 0.5 percent, while Portuguese bonds rose 12 percent, the best performance of the 26 sovereign markets tracked by the gauges.

Bloomberg News

Instant Insights /

Spanish Yields Hit 12-Week High

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