April 4, 2012 / 6:10 AM / 8 years ago

Spanish debt yields rise as deficit problems mount

MADRID (Reuters) - Spanish borrowing costs jumped at a bond auction on Wednesday, jolting wider European markets, as this week’s tough budget failed to calm investors’ nerves about the country’s finances.

Madrid sold 2.6 billion euros ($3.47 billion) of medium-term paper, at the low end of its target range, and two out of three of the yields rose slightly above analysts’ expectations.

“The Spanish Treasury failed to raise the maximum amount and yields, bid-to-cover ratios are lower than the previous auctions and all in all suggests investors remain very cautious towards Spanish bonds at the moment,” said Nick Stamenkovic, rate strategist at RIA Capital Markets.

The average yield of a bond maturing in 2015 was 2.890 percent, up from 2.440 percent when it was last sold on March 15, but below analysts’ expectations of around 3.1 percent.

A 2016 bond, however, yielded 4.319 percent after 3.376 percent a month ago and analysts’ expectations of 3.95 percent, and a bond maturing in 2020 yielded 5.338 percent on average up from 5.156 when it was last sold in September. Analysts had forecast 5.2 percent.

European shares extended their losses after the auction and the cost of insuring Spanish and Italian debt against default rose. Spanish yields rose on the secondary market, where the key 10-year bond was up around 25 basis points close to 5.7 percent.

Concern over the auction also helped drive the euro to a near two-week low versus the dollar.

Spain is trying to assure jittery markets and fellow European governments that it can cut the budget deficit this year, even as the economy slips into a recession that will make its job harder as tax revenues fall and social spending climbs.

It sold 1.1 billion euros $1.47 billion) of the 2015 bond, 973 million euros of the 2016 bond, and 489 million euros of the 2020 bond, while its total target range had been 2.5-3.5 billion euros.

The bid-to-cover ratios were mixed, but still showed firm demand, helped by cheap three-year cash provided at two massive European Central Bank auctions in December and February. ($1 = 0.7497 euros)

additional reporting by London government bonds desk; editing by Philippa Fletcher

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