Spain saw solid demand for its bonds today, paying more than 2 percentage points less to borrow over five years than Italy a day earlier as budget cuts helped ease concerns it could be among the next to fall in the euro zone's debt crisis.
But while the Treasury also paid much less to sell two 10-year bonds than a similar issue just a month ago, yields were still near euro-era highs amid doubts over leaders' ability to find a lasting solution to the region's debt crisis.
"A good auction ... they managed to sell quite a chunk. It won't help to calm these fears everyone in the market is having about funding in 2012, but Spain is considered a far more attractive credit than Italy," strategist at West LB, Michael Leister said.
Spain has been in the line of fire in the euro crisis since Greece was bailed out more than a year ago. But measures which have almost halved the budget deficit along with a massive banking restructuring programme have taken some of the heat off.
Attention has turned instead to the euro zone's third largest economy, Italy, which has seen refinancing costs soar to unsustainable levels and its prime minister Silvio Berlusconi replaced by technocrat caretaker Mario Monti.
"The contrast with Italy is striking. Spain, despite its severe economic problems, is judged to be a safer credit," said Nicholas Spiro, economist at Spiro Sovereign Strategy.
"Italy is walking on very thin ice at the moment given the scale of its funding needs next year. Spain is better placed on this front and has more policy-making credibility in the eyes of investors."
The premium investors demand to hold Italian over Spanish debt rose to a new record of around 162 basis points today Spain's spreads against German debt dropped more than 24 basis points following the auction.
Spain's economy stagnated in the third quarter and is widely expected to sink into its second recession in three years at the start of 2012 as domestic demand shows no sign of returning and exports are hit by the global slowdown.
Meanwhile, the burst property bubble has left the country's banks sitting on €76 billion of potentially troubled real estate assets at end-June and struggling to raise capital to shore up balance sheets in a paralysd market.
As market nerves rise over the future of the euro zone, Spain's government has found it increasingly expensive to issue bonds but with a debt-to-GDP ratio of around 68 per cent, around 20 percentage points below the euro zone average, it has some margin.
Spain also faces a less pressing redemption calendar than Italy, with medium and long-term debt redemptions of nearly €5 billion in 2012 with none due until April.
Rome meanwhile faces redemption and coupon payments of around €00 billion between January and April, Reuters data shows.
The Spanish Treasury raised € billion from the auction toy of three bonds in the primary market, far surpassing a target of €3.5 billion and meaning the Treasury has completed its end-of-year bond issuance goal.
Spain sold €2.5 billion of a bond maturing January 31st, 2016 at a yield of 4.023 per cent, compared to 5.276 per cent when it was last auctioned December 1st. The bond was 2 times subscribed after 2.8 two weeks ago.
The bond maturing April 30th, 2020, sold €2.2 billion at an average yield of 5.201 per cent while a bond maturing April 30, 2021 sold €1.4 billion for 5.545 per cent.
The last time Spain ran a primary auction a 10-year bill November 17th, it paid an average yield of 6.975 per cent, considered by most economists as unsustainable over the long term.
However, while the benchmark 10-year yield was down from recent highs during volatile trade, it was still far above prices paid from the average yields seen before June.
"These are still high levels of rates but they are a lot better than Italy's ones," strategist at Monument Securities Marc Ostwald said.
Reuters
