Spain Plans High-Stakes Bond Sale

Spain will attempt Thursday to sell as much as 2 billion euros ($2.5 billion) of bonds at interest rates that will probably be higher than at its last auction of similar maturities, Bloomberg reports.

Budget Minister Cristobal Montoro said Tuesday that European institutions should help come up with funds to shore up Spain’s lenders as “the door of the markets isn’t open to Spain.” The Treasury is selling two-, four- and 10-year debt, with France auctioning as much as 8 billion euros of securities.

“Comments along the lines of being locked out of the market are very worrying,” John Davies, a fixed-income strategist at WestLB AG in London, told Bloomberg. “Normally, the approach is to try and sound optimistic and talk things up. That’s not how the Spanish rhetoric has sounded recently. It’s going to be painful if they issue 10-year bonds above 6 percent.”

Spain is pressing Germany to let the European Union’s rescue mechanism lend directly to banks as its borrowing costs are approaching the 7 percent level that heralded bailouts in Greece, Ireland and Portugal. Concern about the country’s ailing banks has pushed up Spain’s funding costs, while driving down yields in safer countries like Germany and France.

European Central Bank President Mario Draghi said Wednesday he also opposed allowing the European Stability Mechanism, the region’s new bailout fund, to lend directly to banks. Currently the ESM can lend only to governments that meet certain conditions to tap the funds.

The yield on Spain’s 10-year bond fell 3 basis points to 6.28 percent Wednesday, compared with a euro-era record of 6.78 percent on Nov. 17. The spread with the same German maturities was at 4.95 percentage points, compared with a record 5.48 percentage points on June 1.

At a sale of the 5.85 percent January 2022 bonds on April 19, Spain paid an average yield of 5.743 percent.

The slump in Spanish bonds contributed to France’s 10-year yield falling to a record 2.07 percent this month. That drop in yields may help lower borrowing costs when France sells debt maturing from April 2019 to April 2060 Thursday. The results will be announced at about 11 a.m. in Paris, and marks the first sale of 50-year debt since 2010. The 10-year yield rose eight basis points yesterday to 2.41 percent.