EURO DEBT SUPPLY-Spain to keep borrowing while rates stay low

Fri Nov 16, 2012 10:14am EST

Related Topics

* Spain plans sale of three-, five- and nine-year bonds

* Madrid to keep borrowing despite meeting 2012 funding need

* German Bund sale supported by risk-averse investor mood

By William James

LONDON, Nov 16 (Reuters) - Spain is set to sell bonds next week despite already reaching its 2012 funding target, cashing in on investors' belief that the ECB will eventually have to buy Spanish debt.

Thursday's auction of mostly short-term debt is the highlight of a thin week of debt supply. Germany, due to sell 10-year bonds on Wednesday, is the only other euro zone country scheduled to issue.

The Spanish sale of three-, five- and nine-year bonds is expected to draw bids from loyal domestic investors and international buyers who hold the view that Spain will eventually need to request a bailout from its euro zone peers.

A bailout would unlock the European Central Bank's much-anticipated bond-buying programme -- a prospect that has enabled Spain to keep borrowing at affordable levels despite a worsening recession and rising debt levels.

Even though Spain reached its 86 billion euro funding target for 2012 earlier this month, analysts said it was likely to keep tapping investors for as long as it could while rates are low.

"Of course they will continue with their funding over the remainder of the year, no matter if 86 billion was their actual funding need, or if they now use it for pre-funding (2013) or filling up their cash buffers again," said Norbert Aul, rates strategist at RBC Capital Markets in London.

The prospect of the ECB entering the market, bringing higher prices and profits for those who bought at much cheaper levels when stress peaked earlier this year, has kept yields low despite Spain's fiscal and economic problems.

But, with the ECB only willing to buy short-dated bonds, Spain still struggles to issue much long-term debt, increasing the need to hold regular auctions and persuading many analysts that Madrid cannot indefinitely resist seeking a bailout.

"Over the longer term Spain clearly has to think about how they normalise their funding pattern and extend the maturity of their debt stock," Aul said.

"That's something where an aid request certainly comes into play. However we doubt this decision will come over the next couple of days, or even weeks and might even take months."

Since 2010 the average maturity of Spanish debt has fallen to 6.09 years from 6.62, and around 18.6 percent of the current debt stock, including short-term treasury bills, is due to be repaid in 2013, data from the Spanish Treasury showed. Nearly 40 percent of its debts fall due before the end of 2015.

BUND DEMAND SOLID

The Spanish uncertainty has suppressed investor appetite for risky assets and this should provide ensure Germany's 4 billion euro auction of 10-year debt on Wednesday is well received.

Spain aside, the looming prospect of recession-inducing spending cuts and tax hikes in the United States and painful delays to Greece's aid payments have helped push German yields to their lowest levels since late August.

Ten-year yields sit at 1.31 percent, only 20 basis points from a record low touched in late July, while investors are prepared to accept negative yields on two-year debt -- effectively paying Germany to keep their money safe.

Analysts said that even if Tuesday evening's meeting of euro zone finance ministers provides the long-awaited disbursement of aid to Greece, Germany's auction was still likely to find buyers.

"Given the market environment it should go OK -- not as good as the short-end auctions last week but I don't see a reason why it would struggle," said Artis Frankovics, strategist at Nomura.

"Greece is not the only factor driving the risk-off sentiment... the market will continue along it's current path."

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