January 12, 2012 / 10:23 AM / 8 years ago

Instant view: Spain sells 10 billion euros of bonds

LONDON (Reuters) - Spain sold 9.99 billion euros of government bonds on Tuesday - double its previously announced target - in a sale which analysts said was helped by the short-term nature of the debt, abundant liquidity and strong domestic demand.

Demand for the new three-year paper was 1.8 times the amount on offer, with average yields of 3.384 percent.

Spain also sold bonds maturing in April and October 2016, which drew bids of 2.2 and 1.7 times the amount on offer. The average yields on both bonds fell compared with the last time they were auctioned.

MARC OSTWALD, RATE STRATEGIST, MONUMENT SECURITIES, LONDON

“As tactics go, it is clear that getting as much done as quickly as possible in terms of funding a deficit is wise in the current environment, thus (the amount) sold versus total bids is very impressive. Relative to indicated prices ahead of the sale, the average prices are also good.

“However the big tail - lowest accepted bid, or stop-out price - on the 4.0 percent 2015 and 3.25 percent 2016 does leave the Spanish Treasury a little bit hostage to fortune at forthcoming auctions, i.e. bidding is likely to be even scrappier, with even more cheeky bids.”

ALESSANDRO GIANSANTI, RATE STRATEGIST, ING, AMSTERDAM

“Spain is taking advantage of the situation especially, with the huge liquidity of the banking system taken from the ECB. It’s easier for them to sell the short-term bonds. They were able to issue double the size and bid/covers are in line with average on all three lines. It’s quite positive.

“We can argue that there’s some carry trade by domestic banks around these Spanish auctions...The environment is becoming more favorable with Italy showing the country is on track to reduce its deficit but we still see some challenges especially for Italy.”

ANNALISA PIAZZA, MARKET ECONOMIST, NEWEDGE STRATEGY, LONDON

“We expected good demand for the Spanish paper as investors seem to be extremely short ahead of today’s tap. However, today’s auction is more encouraging than what we anticipated. Dealers have not been stopped by the news that Spain will exceed its budget deficit target by 2 percent in 2011 and - at the current levels - definitely saw some value in Spain. Spreads versus Germany were already tightening ahead of the auction this morning and today’s results might lead to further narrowing in the coming days.”

RICHARD MCGUIRE, RATE STRATEGIST, RABOBANK, LONDON

“Spain had a resounding set of auctions ... this remarkable take-up took place despite markedly lower yields relative to previous sales.”

“Meanwhile, cover was on the whole firm when one considers the larger volume of issuance this time round. A robust set of results which will likely underpin speculation the ECB’s back- door financing of peripheral sovereigns via the LTRO will prove effective.”

“This, in turn, will further underpin the recent ‘risk on’ tone prompting a yet further narrowing of peripheral spreads.”

NICK STAMENKOVIC, BOND STRATEGIST, RIA CAPITAL MARKETS, EDINBURGH

“Pretty decent demand. It’s a step in the right direction, but the bigger test will be the longer-dated auctions further down the road. Clearly the ECB’s 3-year LTRO has been a significant factor behind the recent improvement in sentiment in short-dated Italian and Spanish bond markets and it looks like domestic investors, particularly banks, are probably the biggest buyers today.

“It’s encouraging, but it’s just the start of a very heavy issuance program in the first quarter. There’s a lot more supply to come.”

PETER CHATWELL, RATE STRATEGIST, CREDIT AGRICOLE

“This is another blow-out auction from Spain, following on from December’s larger-than-expected auction. Clearly demand is being driven by the LTRO, and it is serving to build a lot of momentum into the peripheral market more generally.”

MICHAEL LEISTER, STRATEGIST, DZ BANK, FRANKFURT

“It’s a very successful auction indeed. Most notable is the total issue size of 10 billion which is basically double the maximum target announced ahead of the auction.

“A very successful one which bodes well for the Italian auction tomorrow but it shows again that for now there seems to be very substantial demand for short-dated paper and the market seems to be very complacent for now buying these papers which match the maturity of the ECB tender.”

“Basically the only reason this has been taken down so well is abundant ECB liquidity and with another one coming up in February, just for now the market seems very complacent.

“But one should not forget that as much as they issue at the short end, the overall average maturity of their debt stock is decreasing and that’s something I guess the rating agencies in particular will have a close eye on.”

MARKET REACTION:

- Bund future down 29 ticks at 139.06 vs 139.17 before auction.

- Spanish/German 10-yr government bond yield spread xx bps vs 340 bps before auction.

BACKGROUND:

- Italy follows up with sales of two lines of 2014 and one of 2018 bonds on Friday. The Spanish and Italian auctions are seen as tests of investor appetite for the debt of the two countries at the forefront of the sovereign debt crisis.

- Italy must refinance more than 90 billion euros of longer-term bonds falling due between February and April.

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