Demand Continues for Spanish Government Debt

Spain’s successful start to 2013 in the bond market has continued, with the Spanish Treasury selling €4.5bn of debt on 17 January, including bonds with a maturity of as much as 28 years.

The average interest rate paid by Spain on two-year bonds was 2.71%, down from 3.36% in December and a level not reached since March 2012. The rate on the benchmark 10-year Spanish bond edged down to 5.03%, having spiked last year above 7%; a level that many economists believe places an unsustainable burden on governments.

More favourable borrowing costs have encouraged Spain’s government to suggest that the country’s economic recession will be less deep or prolonged than previously expected feared. When drafting its 2012 budget, the government had based its figures on a projected 1.5% contraction in Spain’s economy last year, but officials are now hopeful that the final figure will be lower.

“The government is adopting the right measures to overcome the crisis, and these efforts are about to bear fruit,” said foreign minister, Jos Manuel Garcia-Margallo, at an investment conference this week. “Foreign investors are coming back.”

The strong start to 2013 has enabled Spain to complete close to 9% of its medium and long-term gross funding needs for the year in just two bond auctions.
Investor sentiment towards other struggling Eurozone economies has strengthened thanks to the European Central Bank’s (ECB) pledge to buy bonds if a country applying for a bailout requires it.

Ireland sold €500m of three month treasury bills on 17 January at a 0.2% yield, the lowest since it recommenced issuing short-term paper last July after an almost two-year hiatus after seeking an international bailout. Reports also suggest that Portugal is preparing to offer a five year syndicated bond, as part of its planned return to regular financing in the debt market.

The volume of Spanish corporate debt issuance, which started to recover in 2012, has also accelerated this month. This week has seen Banco Santander sell €1bn of seven year bonds at an interest rate of 4%. In the first fortnight of January, several other Spanish banks, as well as Telefonica and energy companies such as Gas Natural and Red Electrica, sold bonds totalling over €7bn, and most offerings were heavily oversubscribed.

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