* U.S. sells 3-, 6-month bills at historically low rates
* Spanish bank default insurance costs ease
* Investors worry Spanish bank rescue to push up borrowing
By Chris Reese and Ana Nicolaci da Costa
NEW YORK/LONDON, May 29 The U.S. Treasury sold
three-month and six-month bills at comparatively low interest
rates on Tuesday, indicating investors remain hungry for
lower-risk, short-term U.S. debt amid worries over contagion
from Spain's ailing bank sector.
The United States on Tuesday sold $30 billion of three-month
bills at a high rate of 0.085 percent, unchanged from a similar
sale of the bills last week, when the auction rate was the
lowest since April 23.
A total of $27 billion of six-month bills was auctioned on
Tuesday with a high rate of 0.14 percent, which was also
unchanged from a similar sale last week which brought the lowest
rate since an April 23 auction.
While historically low, the auction rates for the bills
remain above the lowest levels reached last year. Three-month
bills were sold at a high rate of 0.005 percent in December of
last year, while six-month bills were sold at a high rate of
0.03 percent in September.
Meanwhile, Spanish efforts to recapitalize Bankia, its
fourth-biggest lender, have eased pressure on the cost of
insuring Spanish bank debt against default - but not for long
because the move is seen as further undermining the country's
The fate of Spain and its banking system is increasingly
intertwined as markets worry that any bank rescue will further
drive up national borrowing costs in a vicious cycle.
The cost of insuring debt issued by Santander and
BBVA fell on Tuesday, having risen in the beginning of
May when risk sentiment was also hurt by an anti-austerity vote
in the Greek elections.
But analysts expect the fall in the cost of insuring Spanish
bank debt against default to be short-lived and that spreads
will realign with those on sovereign bonds on concerns that
Bankia could be just the start of a rolling rescue of an
over-leveraged banking system.
Bankia's parent company BFA has asked for 19 billion euros
in government help, in addition to 4.5 billion the state has
already pumped in to cover possible losses on repossessed
property, loans and investments.
Analysts worry that Spain could eventually be forced to seek
an international bailout with unforeseeable consequences for the
euro zone and financial markets.
A government source told Reuters on Tuesday Spain will
recapitalize the nationalized lender by issuing new debt, not by
injecting bonds, and will likely adopt on Friday a new mechanism
to back its regions' debt.
"I guess a couple of weeks ago we didn't have news about
this bailout. I am surprised that people have taken it that
optimistically. I guess having something injected is better than
nothing," Michael Hampden-Turner, credit strategist at Citigroup
"We are likely to see quite a lot of volatility in the bank
CDS premium as the summer goes on. We see some volatility but I
think it's probably a temporary thing. I think it's likely to
realign (with sovereign CDS prices)."
The cost of insuring debt issued by Santander against
default fell 11 basis points on the day to 401 bps, while the
BBVA equivalent shed 10 bps to 441 bps, according to Markit
Five-year Spanish sovereign CDS meanwhile flirted with a
record high of 560 bps, trading at 556 bps - little changed on
the day and up from 508 bps in late April. Ten-year Spanish
government bond yields also remained above 6 percent danger
levels and not far from 7 percent - a level where Portugal and
Ireland had to start considering bailouts.
"It seems like (increasingly) the credit risk is being
transferred over to the sovereign fundamentally, that's why we
have seen Spain hovering near its record wide," Markit analyst
Gavan Nolan said.
On bank CDS prices, he said: "They had widened out a lot in
the previous few weeks. Mainly I think it's a bit of a pull-back
The trouble for Spanish banks could worsen if clearing house
LCH.Clearnet SA further increases the cost of using Spanish
bonds to raise funds via its repo service.
Earlier this month the clearer raised the initial margin on
two- to 30-year Spanish debt, with the largest move in the 10-
to 15- year maturity sector.
"Imposition of higher initial margin charges from LCH on
Spanish government repo is almost an inevitability now. This may
further depress liquidity in both the underlying government bond
market and term repo market for Spain," Don Smith, economist at