Spain clears short-term debt test, bigger hurdle looms

Tue Jan 17, 2012 10:37am EST
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By John Stonestreet and Nigel Davie MADRID (Reuters) - Spain took in its stride the first test of investor appetite for its debt since a two-notch credit ratings downgrade, selling short-term paper ahead of a far trickier hurdle later this week, when it tries to place longer-dated bonds.

Belgium also smoothly sold short-term paper and sought bids for its first 10-year bond, via syndication, for more than six months - offering a pointer towards sentiment for benchmark debt from countries working to distance themselves from the sharp end of the euro zone crisis.

Spain has been leapfrogged by Italy as markets' most immediate target in the euro zone debt crisis, but it remains firmly in the firing line and Thursday's bond auctions will be a test of efforts by its new government to ease budget concerns.

Analysts expect it to pay around 5.5 percent in annual yield to borrow over 10 years, well down from peaks reached last year and a good distance off the 7 percent level that drove Greece and others to seek international aid.

But risks have risen to the sale due to a series of ratings downgrades and the collapse of talks on the private sector element of Greece's bailout late last week.

"While auguring well as regards Thursday's Spanish bond sales, a successful outcome for these auctions is not assured," said Richard McGuire, analyst at Rabobank.

Spain sold a total of 4.88 billion euros of 12- and 18-month bills on Tuesday, close to the top end of its 5 billion target and aided by a flood of cheap three-year money from the European Central Bank that has fed demand for shorter-term euro debt.

Yields were 2.049 percent and 2.399 percent respectively, lower than expected and little more than half of what was paid to place the same maturities in December.

But the Treasury will have to draw demand from a different pool of investors, over much longer durations than the ECB loans, to place 3.5-4.5 billion euros of bonds on Thursday.   Continued...