(Reuters) - A Spanish bond sale next week will be a gauge of investor confidence in euro zone policymakers' latest efforts to defuse the region's debt crisis, with markets on the lookout for signs of stronger demand.
Spain plans to sell 10-year and new three-year bonds on Thursday, aiming to take advantage of a sharp fall in its borrowing costs over the last six weeks since the European Central Bank vowed to do whatever it took to save the euro.
"This is a window of opportunity for Spain and for the Treasury to go for these longer-dated issues, particularly because it's been front-loading a lot of short dated debt," Nicholas Spiro, managing director of Spiro Sovereign Strategy said.
The auction will be Spain's first since the European Central detailed plans last week to buy the bonds of struggling euro zone countries, such as Spain, to lower their borrowing costs.
However, the 10-year maturity is beyond planned scope of ECB purchases and the sale could struggle given market uncertainty over when Madrid will seek aid from the bloc's rescue funds to trigger the ECB buying.
The rally in 10-year Spanish bonds, which has driven yields down more than 2 percentage points to below 6 percent, is already losing momentum.
The 10-year yield hit a one-week high of 5.85 percent on Friday with the specter of supply and Spain's indecision prompting some investors to book profits.
Prime Minister Mariano Rajoy's government is under pressure from euro zone finance ministers meeting in Cyprus on Friday to clarify its stance.
"We're a bit skeptical that much progress will be done on this front and that potentially could spark some sell-off in Spain," said Artis Frankovics, a rate strategist at Nomura.
DOMESTIC BANKS KEY
Spain will say on Monday how much of the bonds it will sell. It has in recent weeks managed to issue towards the upper end of its targeted range as sentiment towards riskier euro zone debt has perked up in anticipation of ECB intervention.
It also plans to raise 3 billion euros through a private placement with Spanish banks on September 21 as part of an emergency liquidity fund aimed at lowering borrowing costs for cash-strapped regions.
"If they felt they could issue aggressively, and they managed to do that, then great," said Orlando Green, a strategist at Credit Agricole.
"If there was some overbidding, and you can't discount that there would be a lot of demand...that would be the vote of confidence for euro policymakers."
Most analysts expect Thursday's auction to rely on the domestic investors who have been the main buyers at Spanish sales since foreigners bailed out.
Although the promise of ECB intervention has eased tensions in peripheral bond markets, Spain and Italy remain under threat of further ratings cuts while euro zone economic growth has all but ground to a halt, keeping many foreign investors sidelined.
"Many (international investors) don't have Spanish debt in their investment focus and that won't just turn around after a couple of weeks of good performance," said Norbert Aul, a strategist at RBC Capital Markets.
"A fundamentally better environment would have to be sustained with fiscal consolidation and structural reforms actually bearing fruits."
Germany and France will come to the primary market on Wednesday and Thursday respectively. Berlin will offer 5 billion euro of two-year bonds, which analysts said are likely to be snapped up in a market short of high quality short-term debt for use as collateral in money markets.
reuters.com
Spain plans to sell 10-year and new three-year bonds on Thursday, aiming to take advantage of a sharp fall in its borrowing costs over the last six weeks since the European Central Bank vowed to do whatever it took to save the euro.
"This is a window of opportunity for Spain and for the Treasury to go for these longer-dated issues, particularly because it's been front-loading a lot of short dated debt," Nicholas Spiro, managing director of Spiro Sovereign Strategy said.
The auction will be Spain's first since the European Central detailed plans last week to buy the bonds of struggling euro zone countries, such as Spain, to lower their borrowing costs.
However, the 10-year maturity is beyond planned scope of ECB purchases and the sale could struggle given market uncertainty over when Madrid will seek aid from the bloc's rescue funds to trigger the ECB buying.
The rally in 10-year Spanish bonds, which has driven yields down more than 2 percentage points to below 6 percent, is already losing momentum.
The 10-year yield hit a one-week high of 5.85 percent on Friday with the specter of supply and Spain's indecision prompting some investors to book profits.
Prime Minister Mariano Rajoy's government is under pressure from euro zone finance ministers meeting in Cyprus on Friday to clarify its stance.
"We're a bit skeptical that much progress will be done on this front and that potentially could spark some sell-off in Spain," said Artis Frankovics, a rate strategist at Nomura.
DOMESTIC BANKS KEY
Spain will say on Monday how much of the bonds it will sell. It has in recent weeks managed to issue towards the upper end of its targeted range as sentiment towards riskier euro zone debt has perked up in anticipation of ECB intervention.
It also plans to raise 3 billion euros through a private placement with Spanish banks on September 21 as part of an emergency liquidity fund aimed at lowering borrowing costs for cash-strapped regions.
"If they felt they could issue aggressively, and they managed to do that, then great," said Orlando Green, a strategist at Credit Agricole.
"If there was some overbidding, and you can't discount that there would be a lot of demand...that would be the vote of confidence for euro policymakers."
Most analysts expect Thursday's auction to rely on the domestic investors who have been the main buyers at Spanish sales since foreigners bailed out.
Although the promise of ECB intervention has eased tensions in peripheral bond markets, Spain and Italy remain under threat of further ratings cuts while euro zone economic growth has all but ground to a halt, keeping many foreign investors sidelined.
"Many (international investors) don't have Spanish debt in their investment focus and that won't just turn around after a couple of weeks of good performance," said Norbert Aul, a strategist at RBC Capital Markets.
"A fundamentally better environment would have to be sustained with fiscal consolidation and structural reforms actually bearing fruits."
Germany and France will come to the primary market on Wednesday and Thursday respectively. Berlin will offer 5 billion euro of two-year bonds, which analysts said are likely to be snapped up in a market short of high quality short-term debt for use as collateral in money markets.
reuters.com
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