* Madrid sells 12-mth, 18-mth T-bills
* 12-mth yield 5.022 pct, highest since 1997
* Belgian 12-month auction yields at 3-yr high
* Debt investors flee ever deeper into euro zone core
By Paul Day and Robert-Jan Bartunek
MADRID, Nov 15 Spain paid yields not seen
since 1997 and Belgian borrowing costs hit three-year highs at
short-term debt sales, as ebbing confidence that the euro zone
crisis can be tamed sent bond investors scurrying ever deeper
into the region's core.
Driven by renewed concerns that Italy, the euro zone's third
largest economy, will still need a bailout despite appointing a
former EU commissioner to head a revamped government, contagion
from the debt crisis spread wider.
That caught Madrid and Brussels right in the firing line at
Solid demand allowed Spain to sell 3.2 billion euros of 12-
and 18-month T-bills, but both yields -- at 5.022 percent and
5.159 percent, respectively -- hit their highest at a primary
auction since 1997.
Belgium raised 2.725 billion euros, with three-month yields
at 1.575 percent, the highest since January 2009, and 12-month
paper selling at a three-year high of 3.396 percent.
David Schnautz, an interest rate strategist at Commerzbank,
said short-term debt issued by euro zone nations had previously
been far less affected by safe-haven flows than longer-term
"But this has now changed..... We saw Italy at 6 percent
last week and Spain today at 5. In this environment Belgium is
not treated as badly, but it takes its toll," he said.
"Contagion is spreading more and more into the (euro zone)
Only Germany stayed immune from investor concerns, with its
sovereign yield premium over the region's other top-ranking debt
widening, in some cases to record levels.
AAA-rated France's spreads rose to their highest levels in
over 20 years at 189 bps, and the cost of insuring French,
Italian, Spanish and Belgian debt against default rose to
The Spanish 10-year premium over Bunds rose 7 basis points
to 460 bps after the auction, an intraday euro-era peak and
their widest since July 1995, according to Reuters data.
The equivalent spread for Belgium, confronting a debt-to-GDP
ratio around 100 percent in a domestic political vacuum, pushed
up to a euro-era record 300 bps.
Shorter-term debt sales are often propped up by the need of
domestic banks to park cash, so for Spain a yield above 5
percent on one-year paper points to longer-term rates rising
towards 7 percent, a level generally viewed as unsustainable.
Spain's ability to borrow on markets over longer periods
faces an early test on Thursday at an auction of between 3
billion euros ($4.1 billion) and 4 billion euros of a new
benchmark 10-year bond.
"The frightening part is just how much yields have risen
since the (Spanish bill sale). That is a colossal rise, it does
really emphasise just how much anxiety there is," strategist at
Monument Securities Marc Ostwald said.
"In terms of the actual yields, it doesn't bode well for
General elections in Spain on Sunday, which the opposition
centre-right is expected to win comfortably, have also stoked
uncertainty over the euro zone's fourth largest economy,
hamstrung by a high fiscal deficit, anaemic growth rates and
chronically high unemployment.
"If the new government needs to borrow at these levels for
the short term it won't be so bad and they'll be hoping a new
wave of measures will help calm things down," economist at
Capital Economics Ben May said.
"There is a risk, of course, this won't happen."
Some economists said the fact the Spanish Treasury was able
to sell paper in current market conditions, even at a high
price, was encouraging.
"On average, the T-Bill auction is a positive signal for the
market that investors are still buying Spanish debt despite
concerns as to what will happen after the elections," analyst at
Newedge in London Annalisa Piazza said.