Madrid denies suspension of bond auction due to market turbulence

SPAIN:SPAIN'S TREASURY said yesterday it has suspended a bond auction originally planned for August 18th, but was careful to note the cancellation of the auction was not a response to market turbulence.

The treasury also said it was sticking to plans to issue a new five-year bond on September 1st.

Spain paid sharply higher yields to sell €3.3 billion of medium-term bonds earlier as a market attack on Spanish and Italian debt pushed financing costs up to unsustainable levels.

The treasury in Madrid sold €2.2 billion of April 2014 bonds at an average yield of 4.813 per cent, compared with 4.291 per cent when it sold similar debt on July 7th. It also auctioned €1.1 billion of January 2015 bonds to yield 4.984 per cent.

The treasury had aimed to sell a maximum of €3.5 billion.

Spanish 10-year yields have jumped about 70 basis points to a high of 6.46 per cent since a euro region leaders’ summit on July 21st failed to convince investors the spread of the debt crisis can be halted by a so-called selective default for Greece.

Spanish 10-year bonds yielded 6.07 per cent after the auction as the spread, or difference, between Spanish and German bonds of that tenor narrowed to 362.6 basis points. However, yields rose again in the afternoon, rising to 6.284 per cent at the close, with the spread rising to 399 basis points.

Demand for the three-year bonds yesterday was 2.14 times the amount sold, compared with 2.29 times in July.

The sale will likely be Spain’s only bond auction this month.

“The Spanish treasury has decided to follow the precedent of the previous two years and not summon a long-term auction on August,” it said in a statement.

Elena Salgado, Spanish finance minister, on Wednesday night insisted that the auction would go ahead in spite of nervousness in the bond markets, in order to show that Spain was capable of raising the money it needed to repay maturing debt and finance its budget deficit. Spain had never cancelled an auction even in turbulent times, she said.

Speaking after an emergency meeting with prime minister José Luis Rodríguez Zapatero to discuss the crisis and jump in debt yields, she acknowledged the volatility was worrying but attributed turmoil this month to thin volume because of the holiday season.

“I don’t think this is a response to the market turbulence, I think this is a summer thing. During the crisis it has been usual for a number of countries to cancel their auctions. But considering the crisis, it’s possible to interpret anything however you like,” interest rate strategist at RBS Harvinder Sian said.

Spain still needs to sell about €38 billion in debt by the end of the year and has completed 60 per cent of its 2011 financing, less than the euro-area average of 67 per cent, according to a report by UniCredit. – (Reuters/Bloomberg)