Spanish debt market continues to thaw

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A clutch of successful eurozone sovereign bond auctions sparked fresh hopes that this year’s rally can surge on despite uncertainty over Greece.

Spain hailed a €4bn sale of its debt on Thursday as a sign of revived investor confidence in its economic reform programme, while France raised €8.46bn in new debt with ease.

The Netherlands was even able to issue its first bond denominated in dollars, selling $3.3bn, nearly twice its target amount to mainly US investors.

The Dutch launched the dollar bond because it offers cheaper funding. They raised dollars and immediately swapped the money back into euros at favourable rates because of strong demand for the US currency. The extra premium to swap euros for dollars is 71 basis swaps.

The successful Spanish and French auctions were mainly due to buying from domestic banks, which can use cheap loans from the European Central Bank to buy the debt.

Spain met its maximum proceeds target in the auction of three separate medium-term bonds, but paid more than in previous similar sales.

France raised the €8.46bn in three bonds of two, three and five year maturities.

The auction success was particularly important for Spain, which has been under pressure in the markets in recent weeks amid some worries over its ability to meet tough fiscal targets.

Luis de Guindos, Spain’s finance minister who has spearheaded a renewed attempt at cleaning up the country’s banking sector since taking his post this year, said the auction was an “important sign of confidence in the Spanish economy, and the measures being adopted [by the government]”.

Madrid sold €2.27bn of a bond maturing in July 2015 and paid an average yield of 3.33 per cent, higher than the 2.86 per cent for a similar auction this month. The yield, which moves inversely to price, was lower than the 3.45 per cent that similar bonds were being traded at in the open market before the auction, according to Bloomberg data.

Another bond to be repaid in January 2015 sold for an average yield of 2.97 per cent, while a 2019 maturity was priced at 4.83 per cent.

Spain, which has long been seen as a barometer for stress in the eurozone, saw its borrowing costs last year shoot to the highest level since the country left the peseta to join the euro.

An indication of the sharp fall in Spain’s borrowing costs since last summer was the 2.97 per cent yield of the January 2015 bond. This was about 2 percentage points lower than the 4.9 per cent yield a similar bond was sold for in August 2011.

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