Spain holds line against spread of Greek contagion

Madrid: Spain sold 2.3 billion euros (Dh10.8 billion) of five-year bonds yesterday, paying more than it did two months ago and easing market jitters as investors drew a clear line between its risk profile and that of Greece.

Yields on the benchmark 2015 issue with a coupon of three per cent rose to 3.6 per cent, up from 2.8 per cent at the last issue in March in what was seen as a key test for Spain, viewed as being in the firing line of any contagion from Greece's sovereign debt crisis.

The bid-to-cover ratio rose to 2.4 from 1.5 at the previous auction, showing there was no shortage of demand.

Markets reacted positively to the sale, sending the euro zone government bond benchmark Bund future to an intraday low of 125.74.

"The (Spanish) bond sale was not at all bad and resulted in an unwinding of safe-haven flows," said Monument Securities in London's bond strategist Marc Ostwald.

"There is a relief rally on Bonos and punishment for expensive Bunds."

Earlier the spread between Spanish government bonds and Bunds had widened to its highest level since the inception of the euro over 140 basis points, though it was still way off the 775 basis points between Greek debt and bunds.

Just two weeks ago the Spanish spread was around 80 basis points. Analysts said tough conditions for Spain to place its debt would continue in coming months.

"The amount sold was more or less mid-range of forecasts so it reduces a bit the idea that it is a problem for Spain to issue bonds," said UniCredit's Luca Cazzulani.

However, he said it had become more expensive for Spain to pay its debts and the country needed to issue much more this year..

"(The sale) is still a relatively low amount and Spain will need to step up the rate of issuance to meet its targets," he said.

The auction came a week after Spain's debt rating was cut by agency Standard & Poor's to AA from AA-plus.