Interest rates jump in Spanish debt auction

AP News
Posted: Apr 17, 2012 7:53 AM
Interest rates jump in Spanish debt auction

Spain sold more than (EURO)3.2 billion ($4.2 billion) in short-term debt Tuesday with demand strong but interest rates sharply higher, reflecting continuing investor concern over the country's finances.

The Treasury paid a yield 2.6 percent on selling (EURO)2.1 billion ($2.7 billion) in 12-month notes compared to 1.4 percent in the last such auction March 20. It paid 3.1 percent to sell (EURO)1.1 billion ($1.4 billion) in 18-month-bills, up from 1.7 percent.

The department had set an upper target of (EURO)3 billion ($3.9 billion) for the sale.

Demand was almost triple the amount offered for the shorter-term notes and almost four times that for the 18-month bills.

Spain's borrowing costs have risen sharply in recent months despite a series of reforms aimed at calming market nervousness over whether the country's ability to afford mounting debts as its economy shrinks.

The Treasury faces a bigger test Thursday when it looks to offload up to (EURO)2.5 billion in debt maturing in 2014 and benchmark 10-year bonds.

Yields for 10-year bonds on the secondary market _ an indicator of what the government may have to pay _ rose above 6 percent on Monday for the first time since the conservative government took office in December.

The rate edged back to 5.9 percent by midday Tuesday after the debt auction. The difference between the Spanish yield and that of the benchmark German bund was at 422 basis points, down from nearly 430 basis points on closing a day earlier.

Spain is expected to enter its second recession in three years this quarter, with the country's central bank forecasting its economy will contract 1.7 percent this year. The unemployment rate is nearly 23 percent, rising up to almost 50 percent for those aged under 25.

Investors are also concerned that the country's banks are weighed down by a mountain of bad loans from the collapse of the property market in 2008 while some of its 17 semiautonomous regional governments have overspent wildly.

A senior government official told reporters Monday that Spain will probably step in and take over the finances of one or more of the country's debt-crippled regional governments before the end of the year.