Sharp fall in Spanish debt cost

Spanish borrowing costs experienced the third sharpest daily fall since data were first recorded in 1993 as yields dropped below the key level of 6 per cent.

The move came after successful bond auctions eased investor nervousness following Wednesday’s co-ordinated central bank action.

French 10-year bond yields, which move inversely to prices, also saw one of the biggest one-day falls after the auctions of government debt by Madrid and Paris. France and Spain raised €8.05bn between them.

Spanish 10-year yields dropped to 5.74 per cent – the first time in more than two weeks that the country’s borrowing costs have fallen below the key level of 6 per cent – and French yields fell to 3.11 per cent, levels last seen a month ago. Italian yields fell to 6.67 per cent.

The fall in Spain’s borrowing costs was particularly significant as the country has been sucked deeper into Europe’s sovereign debt crisis as the Italian bond markets have sold off steeply. Spanish yields are now almost a percentage point below those of Italy. Madrid sold with ease a full allocation of €3.75bn of bonds. France also raised €4.3bn of debt.

Investors have come to view a borrowing cost of more than 7 per cent for 10-years, a level Spanish yields have flirted with in recent weeks, as an inflection point that can push governments to seek an international rescue. Greece, Portugal and Ireland were all bailed out after their debt breached that level.

Although Madrid easily sold at the top of a €2.75bn to €3.75bn targeted range, the Spanish government was forced to pay sharply higher yields than in sales held earlier this year, but lower than the levels at which the same debt was trading in the secondary market before the sale.

The average yield for €1.7bn of five-year bonds maturing in 2017 rose to 5.544 per cent, from 4.848 per cent in the last similar auction held earlier this month.

The amount of interest demanded by buyers for the sale of €1.2bn of Spain’s three-year debt rose from 3.639 per cent in an October sale to 5.187 per cent.

The average yield on the 2016 bond increased to 5.276 per cent, from 4.872 per cent in the last equivalent auction held in February.

A sale of 10-year debt two weeks ago saw Spanish borrowing costs rise to a euro-era high of 6.975 per cent, and helped further convince the country’s electorate to sweep from power the Socialist government that had ruled since 2004 in favour of the centre right Popular party.

Since Mariano Rajoy, the PP leader, won the largest parliamentary majority in more than 20 years, he has been criticised for failing to outline sufficiently his economic reform programme, which has helped sustain pressure on Spanish borrowing costs from worried investors.

Spain had been planning to sell up to €3.75bn in new three-year bonds, but decided instead to split the issue into the three separate sales of existing debt.