Spain exceeds target in bond auction

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Spanish bond markets jumped sharply after the country for the second time in a week sold more than its maximum target of debt at a government auction.

Spanish 10-year yields, which have an inverse relationship with prices, fell 25 basis points to 5.43 per cent as traders speculated that some buyers of Madrid's bonds were looking to earn a big yield pick-up by using them as collateral for loans at next week's first European Central Bank three-year tender.

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One trader at a European bank said: "Some banks are buying sovereign debt to get the high yields for lending to Spain. Then they can take advantage of the low rate of 1 per cent for borrowing three-year money from the ECB."

However, other market participants said not all banks, particularly larger ones, would want to do this kind of "carry" trade as they were reluctant to increase exposure to peripheral debt markets.

Traders warned the market was still nervous because of expectations that Standard & Poor's would carry out its threat to downgrade 15 eurozone nations.

Spain sold €6.03bn of bonds on Thursday, compared with its upper target of €3.5bn.

The Treasury said the average yield on the 10-year bonds due in April 2021 was 5.55 per cent, slightly higher than the 5.43 per cent at the previous auction of the same paper in October, but lower than the pre-auction rate in secondary market trading of just below 5.70 per cent. It sold €1.4bn at a bid-to-cover ratio of 2.2 times.

It also sold €2.18bn of April 2020 bonds at an average yield of 5.20 per cent and bid-to-cover of 1.5, and €2.45bn of five-year bonds at a yield of 4.02 per cent – more than a percentage point below the previous sale two weeks ago – and at a bid-to-cover of 2.0.

Spanish and Italian bonds have both been supported in the secondary market through purchases by the European Central Bank, but since August Italian yields have leapfrogged those of Spain amid rising investor concerns about Italy's accumulated burden of public debt.

On Wednesday, Italy paid 6.47 per cent on €3bn of five-year bonds. That yield, a fresh Italian record since the adoption of the euro in 1999 and up from 6.29 per cent last month, is regarded by many analysts as unsustainable and underlines worries about the future of the entire eurozone.

On Tuesday, Spain's Treasury sold €4.9bn of 12-month and 18-month bills, above the top end of the targeted range, at rates of almost 1 percentage point below the 14-year highs seen in a similar auction in November. That followed a European Union summit agreement to entrench fiscal discipline.