Good demand for Spanish bonds

Thu, Feb 16, 2012, 00:00

Spain saw solid demand for its debt today, easily shifting what it wanted to sell at a bond auction, although concerns about Greece's second bailout and the fragility of some of the euro zone's riskier economies pushed financing costs higher.

An auction in France also attracted good support, leaving two-year yields below 1 per cent, showing investors continue to favour the stronger north.

Underlying the problems facing Spain, data today showed its economy - which is facing even more austerity - contracted in the fourth quarter for the first time in two years. By contrast, France earlier in the week reported higher-than-expected growth.

While demand at the Spanish auction was high, the average yield on a three-year offering jumped more than 47 basis points from its last outing in early February.

"There's pressure on the prime minister to enact more austerity especially considering their target for this year. Effects of austerity and ambitious deficit targets, it's just a reflection of the general fear that's in the market," strategist at 4Cast Jo Tomkins said.

The premium investors demand to hold Spanish over German debt rose to around 381 basis points, around 25 basis points from the close on Wednesday, after euro zone finance ministers failed to agree on a second aid package for Greece.

"We've seen the Treasury hit the maximum target for its bonds, with strong demand, which is a sign of confidence in the Spanish economy and the measures that are being taken," said Economy Minister Luis de Guindos in Parliament on Thursday.

The economic picture, however, was grim.

Gross domestic product shrank by 0.3 per cent in the fourth quarter on a quarterly basis, as forecast in a flash estimate, and after stagnating in the third quarter, final official data showed today.

On an annual basis the economy grew by 0.3 per cent in the fourth quarter, in line with Reuters forecasts consensus and compared to 0.8 per cent in the third quarter.

"Some countries in the euro zone may just avoid a recession, but that may be more difficult for Spain. Given the need for fiscal consolidation in the country and the pressure that puts on domestic demand, it's going to be very difficult for Spain to avoid recession," RBS economist Nick Matthews said.

Economic output in the 17-nation currency area fell 0.3 per cent in the fourth quarter from the third, official data showed yesterday as the sovereign debt crisis crushed a recovery and looked set to push the region in to a mild recession.

The Italian economy joined Belgium, Greece and Portugal in formal recession having already shrunk in the third quarter of 2011, the data yesterday showed.

Purchasing data from Markit for January showed a slight improvement for the Spanish manufacturing and services industries, but it may not be enough for an economy that has been in recession or close to stagnation for almost five years.

Spain had been growing at an above-average rate since the country entered in to the euro zone monetary union 12 years ago, but the boom was largely due to the housing expansion fuelled by cheap loans and has been struggling since the 2007 crash.

In the fourth quarter, exports were the only sector to show growth with industry surviving solely because of demand outside of Spanish shores, though even that is slowing as the economies of Spain's main trading partners stumble.

Meanwhile, Spain's new government is fighting to reduce a budget deficit it has estimated at 8 per cent of GDP in 2011 to a target of 4.4 per cent this year, implying necessary savings of an estimated around €45 billion.

The International Monetary Fund believes GDP will contract by 1.7 per cent in 2012 and the economy will remain weak through next year, weighed down by the government's aggressive austerity measures.

On an annual basis the economy grew by 0.3 per cent in the fourth quarter, in line with consensus and compared to 0.8 per cent in the third quarter.

In 2011, the economy grew by 0.7 per cent compared to a fall of 0.1 per cent in 2010.

Reuters