SPAIN PAID a high price for deepening concerns over the euro zone’s sovereign debt problems yesterday as it was forced to give investors the biggest premium on new bonds for two years.
It had to pay an average yield of 3.53 per cent on the sale of €2.35 billion of five-year bonds, 72 basis points (0.72 of a percentage point) more than when it sold five-year bonds only a month ago.
It is the highest yield for the sale of new Spanish bonds over this maturity since May 2008.
Investors demanded the extra premium because of rising fears that Spain will struggle to reduce its budget deficit and with some analysts warning that the country could be forced to restructure its debt or even borrow from the International Monetary Fund.
Portugal was also forced to pay extremely high yields 24 hours earlier when it sold €500 million in six-month bills at 2.95 per cent. That was four times more than in the previous equivalent auction as investors again priced in concern about contagion from Greece’s debt crisis.
However, some analysts said there were positive signs from the bond sales. Unlike Greece, Spain and Portugal can still tap the capital markets, albeit at a premium.
Huw Worthington, fixed income strategist at Barclays Capital, said: “Spain had to pay a big concession but at least they have access to the market. It will be interesting to see how other euro-zone auctions fare next week.”
Investors bid for 2.35 times the amount of bonds sold in the Spanish auction, higher than the 1.76 times bid ratio in the previous five-year bond sale. There was also strong demand for the Portuguese bill.
Marc Ostwald, a fixed strategist at Monument Securities, added: “The Spanish have had to pay a lot more than they did at the last auction but they could have sold more if they’d wanted to.”
Italy, Germany and the Netherlands are due to sell bonds next week. Portugal is likely to delay its sale to the end of May.
Spain had its credit ratings cut by Standard Poor’s last month. The agency lowered Greece by three levels to junk grade last week and Portugal by two steps.
Moody’s also warned that it may cut Portugal’s ratings this week. – Copyright The Financial Times Limited 2010
