Spain, Italy sell treasury bills

Spain's short-term cost of borrowing climbed to three-year highs at an auction today, showing strong EU action on Greece last week has failed to cap worries that Europe's debt crisis could still spread.

Spain sold €2.9 billion of 3- and 6-month Treasury bills, though demand was lower and yields on both issues were higher than at the last of the regular sales in June.

The country has been under intense market scrutiny as one of the euro zone states that, alongside Italy, are too big to be bailed out in the same way and the deal for a second rescue of Greece on July 21st has done little to ease investor worries.

Spain paid euro-era record high rates to sell two long-term bonds on Thursday before EU leaders met on Greece last week.

Economists say Spain is unlikely to meet its growth forecast of 1.3 per cent in 2011, casting doubt over the ruling Socialists' ability to cut the deficit to a planned 6 percent of gross domestic product before the end of the year.

The premium investors demand to hold Spanish over German debt stood at 316 basis points today before the auction, though this rose to around 329 bps shortly after. The Spanish-German spread hit euro-era high of around 370 bps on July 18th.

The Treasury sold €750 million of 3-month bills at an average yield of 1.899 per cent compared to 1.568 per cent at the previous auction and at a bid-to-cover ratio of 6.3 after 9.5 in June.

Spain also sold €2.14 billion of 6-month bills, with the average yield rising to 2.519 per cent, the highest since December 2010, from 1.776 per cent in June, while the offer was 2.2 times subscribed after 3.8 times at the last auction.

The Treasury had aimed to sell between €2 billion and €3 billion of the two bills.

Elsewhere, Italy sold six month bills at the highest yield in almost three years and demand for the securities declined.

The Treasury priced €7.5 billion of the bills, matching the maximum set for the sale, to yield 2.269 per cent, the highest since December 2008 and up from 1.988 per cent at the previous auction on June 27th.

Italy also sold 1.5 billion euros of zero-coupon bonds maturing in 2013. Investors requested 1.56 times the bills on offer, down from 1.72 at the June sale.

Reuters/Bloomberg