* Raises above-target 5.8 bln eur at lower yields
* Foreign buyers focus on 2026 bond, says market maker
* Benchmark 10-year Spanish bond yield dips back below 5 pct
By Manuel María Ruiz
MADRID, Jan 10 Recession-hit Spain kicked off a
tough 2013 funding programme on Thursday with a well-received
debt auction that raised 5.8 billion euros, selling above its
target range at lower borrowing costs.
Most demand was for paper maturing in March 2015 that would
be covered by a European Central Bank bond-buying programme if
Spain applied for international aid, offering an additional
safety net for investors seeking higher rates of return.
"It was a good auction. Demand was strong for three...
reasons: risk aversion indicators are at a low, volatility has
nose-dived and (investor) portfolios are very liquid," said Jose
Luis Martinez, Citigroup strategist in Madrid.
The market's reaction told the same story, with the yield on
Spain's benchmark 10-year bond dipping after the
auction to 4.97 percent, its lowest level in 10 months.
Spain, which placed the 2015 bond at around half that rate,
is mired in recession and the government has slashed spending to
reduce a high public deficit, which has aggravated the slowdown.
It has said it will need to raise 121 billion euros ($158
billion) in bonds this year - up almost 8 percent from last year
- as piles of debt mature and the country's financially troubled
autonomous regions soak up huge sums in rescue funds.
At Thursday's sale, Madrid sought to raise between 4-5
billion euros, split between three maturities.
It drew demand from foreign investors, which was strongest
for the longest-dated bond on sale, a market maker said.
Due in July 2026, it raised 470 million euros and was 2.9
times subscribed, compared to 2.1 times when it was last sold a
year and a half ago. The average yield fell to 5.555 percent
from 6.191 percent.
The March 2015 bond, which the market maker said was more
popular with domestic banks, raised 3.397 billion euros, with a
bid cover of 2.1 and a yield of 2.476 percent.
That paper benefited from the backstop of the sovereign
bond-buying programme that the ECB launched in September, which
is focused on debt of up to three years.
The same was true of a one-year bill in Italy, which sold at
the lowest rate in three years as investors brushed off concerns
about political tensions ahead of elections.
"Investors are hunting for higher returns, and with core
euro zone paper offering yields just above zero are lured by the
yields of peripheral debt," said Giuseppe Maraffino, a
strategist at Barclays in Milan.
Spanish Prime Minister Mariano Rajoy has been studying
whether to request aid to bolster Spain's finances. But it is
unclear whether he will follow Greece, Portugal, Ireland and
Cyprus in asking for emergency help in a euro zone debt crisis
now into its fourth year.
Analysts and a source with knowledge of the situation said
demand on Thursday was strong from both international and
domestic investors, potentially easing pressure on the
government to request aid.
"Demand was impressive at both the short end and longer end
with average yields lower than the previous auction,
highlighting strong investor demand, both domestic and
overseas," said Nick Stamenkovic, a strategist at RIA Capital
Markets in Edinburgh.
"Against this backdrop the Spanish government will be in no
rush to request external assistance," he said, though he added
that he expected it to happen by the middle of the year.
Last year, Spain's own banks were the main buyers of the
country's sovereign debt as international investors sold
heavily. The country has been downgraded to just one notch above
junk status by two rating agencies.
The third bond sold on Thursday, maturing in January 2018,
sold at 3.988 percent compared to 4.680 percent when it was last
auctioned on Nov. 8. The bid to cover rate rose to 2.6 from 1.6.
Spain faces several funding humps this year, with 14 billion
euros in bonds maturing in January, 15 billion euros in both
April and July, and 16 billion maturing in October.
The average interest rate on all its outstanding debt has
risen steadily since the debt crisis began and stood at 4.12
percent in November, according to data from the Treasury.
Meanwhile the average maturity has dropped to 6.04 years,
also as of November last year, from 6.59 years in 2008, as Spain
focuses on the shorter bonds that are meeting higher demand.
"Despite a more ambitious bond issuance plan, Spain is still
struggling to stem its shrinking average maturity of its
sovereign debt," wrote Raj Badiani, analyst at IHS Global
"...This implies that Spain will continue to face a
challenging sovereign financing cycle in the next few years."
While Thursday's auction was a positive surprise, the bigger
test, analysts said, would be to raise significant amounts in
10-year or longer-term issues over the coming months.
The 2015 bond was a new issue and the first Spanish bond to
carry a CAC - or Collective Action Clause - intended to make it
easier to restructure government bonds in a crisis.
All new euro zone government bonds issued from Jan. 1 will
carry CACs, which allow a two-thirds majority of bondholders
that agrees to a restructuring to force a dissenting minority to
An absence of CACs on many Greek bonds allowed hedge funds
to make big profits by dodging a writedown of the country's
privately-held debt last year.