‘Failed’ Spanish bond sale scares markets

Updated: Spain failed on Thursday to achieve its maximum target in a sale of 10- and 15-year bonds and paid higher rates, sparking fear in the bond and stock markets, with Spain's Ibex down as far as 4.4 percent on fears of a new recession in Europe before rising again to close the day 2 percent down.

'Failed' Spanish bond sale scares markets
Spain raised € 3.2 billion ($4.1 billion), within the range it had targeted but below the maximum €3.5 billion it had sought. File photo: Javier Soriano/AFP

Spain raised € 3.2 billion ($4.1 billion), within the range it had targeted but below the maximum €3.5 billion it had sought.

Demand was just 1.5 times the amount offered, less than at previous similar auctions.

The Treasury sold €2.15 billion of 10-year bonds and €1.05 billion of 15-year bonds.

Yields on the ten-year bond rose to 2.196 per cent, up from 2.075 per cent during the last similar auction in October when it hit a historic low.

Ten-year bonds are considered to be the main barometer of a country's standing on the eurozone bond market.

Yields on the 15-year bond fell to 2.842 per cent, down from 3.514 per cent during the last similar auction in May.

Spain, the eurozone's fourth-largest economy which exited recession last year, plans to borrow slightly over €242 billion from debt markets this year, with €133 billion in medium- and long-term bonds.

Investor sentiment for Spain, which came close to requesting a sovereign bailout at the height of the eurozone crisis, had improved in previous auctions due to its better growth outlook and growing confidence in eurozone periphery countries.

But lower growth forecasts in Germany, the eurozone's largest economy, and ultralow inflation, have fulled fears over slowing global growth and hurt sentiment for eurozone periphery nations.

Bond yields for these countries shot up on Thursday in the secondary trading markets, indicating that investors are demanding more to hold on to debt from these countries.

The yield on Spanish 10-year bonds jumped to 2.356 per cent from 2.116 per cent on Wednesday.

Greek 10-year bonds jumped to 8.656 per cent from 7.854 per cent.  Portugal rose from 3.585 per cent from 3.286 per cent, while Italy climbed to 2.665 per cent from 2.422 per cent.

European stock markets also slumped following the Spanish bond auction, with the Paris, Milan, Madrid, Lisbon and Amsterdam exchanges each fell by more than 3 per cent.

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Spanish bond yields hit record low

The yield on Spanish, Italian and German 10-year government bonds fell to new record lows on Tuesday, the day after the ECB began a massive bond-buying programme to ward off deflation in the eurozone.

Spanish bond yields hit record low
The European Central Bank, in Frankfurt, launced a new quantitative easing programme on Monday. Photo: Daniel Roland/AFP.

The rate of return to investors on 10-year Spanish government bonds fell to 1.231 percent from 1.275 percent on Monday. 

The yield on 10-year Italian government bonds fell to 1.220 percent from 1.280 percent and those of Germany fell to 0.279 percent from 0.312. 

The European Central Bank launched on Monday a so-called quantitative easing (QE) programme that will see it buy €60 billion of eurozone government and corporate bonds through next September.

The ECB hopes that by buying bonds off investors they will invest the money elsewhere, thus boosting growth and preventing a dangerous cycle of falling prices from setting in.

Eurozone bond yields have been falling in recent weeks to record lows as investors anticipated the increased demand from ECB purchases.

The yield on French 10-year bonds was at 0.568 percent in morning trading, above the record low of 0.521 percent set in January.

Greek bonds are not benefitting from the decline in yields due to a new spike in concerns over its finances as well as Greek debt not being included in the QE programme.