March 28, 2024

Spanish and French Bond Sales Draw Strong Demand

MADRID — Spain passed its biggest test of market sentiment so far this year on Thursday, selling far more longer-term debt than expected as the government pressed ahead with efforts to tackle its problems with the help of a European Central Bank backstop.

France also drew strong demand at its first bond auction since Standard and Poor’s stripped the country of its AAA credit rating.

Spain’s first 10-year bond offering since mid-December raised €3 billion, or $3.9 billion, at a yield of 5.403 percent, broadly in line with analysts’ expectations.

The yield was down more than 150 basis points from a previous sale of the bonds in November, offering some measure of the progress Madrid and euro zone policymakers have made in easing the pressure on its finances.

In all, the Treasury sold €6.6 billion of bonds maturing in 2016, 2019, and 2022, far more than the €4.5 billion targeted. Bid to cover rates on the issues ranged from 2.0 to 3.2.

“The solid demand is a clear sign that market interest” for some of the euro zone’s weaker members “has clearly picked up,” said Annalisa Piazza, market economist at Newedge Strategy in London.

Other euro zone sovereign debtors have leapfrogged Spain to become more prominent targets for investors, but Madrid remains in the market’s sights.

Spanish sovereign yields rose after the auction, with 10-year paper 9 basis points higher at 5.28 percent. The spread between 10-year Spanish and the benchmark German Bunds also widened 9 basis points to 347 basis points.

Peter Chatwell, a rate strategist at Crédit Agricole, said he expected that trend to reverse during the day “as the fact is this is another auction which exceeds the target amount.”

Spain has easily sold shorter-dated debt in recent weeks, aided by the European Central Bank flooding banks with cheap three-year loans and buying Spanish and Italian debt regularly on the market.

But while banks were willing to reinvest the three-year loans over a similar or shorter time scale, finding buyers for 10-year paper was considered a sterner test.

In Paris, the national debt management agency sold €7.965 billion of medium-term bonds at the top of a target range of €6.5 billion to €8 billion. It received bids for €18.9 billion.

S.P.’s downgrade on Friday was largely anticipated by the market and has had little impact on French yields in the secondary market and in a short-term bill auction on Monday.

Article source: http://www.nytimes.com/2012/01/20/business/global/spanish-and-french-bond-sales-draw-strong-demand.html?partner=rss&emc=rss

Doubt About U.S. and European Leadership Threatens Market

With deficit reduction talks all but dead in Washington and several bond auctions by fiscally shaky governments on the Continent this week, market specialists say the coming days may well be treacherous, especially if legislators in the United States do not agree on a plan to reduce the deficit.

That prospect looked increasingly likely. Despite the occasional sharp sell-off in the markets, investors have mostly been hoping for the best. In the United States, that means a blueprint for savings and a respite from wrangling over government spending, while in Europe the hope is that the European Central Bank will do more to shore up faltering borrowers like Italy and Spain.

But in each case, the likelihood of bad news outweighs the chances of a breakthrough, said Adam Parker, Morgan Stanley’s chief United States equity strategist.

“It should make people nervous,” Mr. Parker said. “There is a feedback loop between Europe and the rest of the world and that can slow growth. And the political polarization in Washington is also worrisome to investors.”

As trading volume thins before Thanksgiving on Thursday, all these concerns increase the odds of volatility on Wall Street, said Ronald Florance, director for investment strategies at Wells Fargo Private Bank. “It doesn’t take much to have big moves,” Mr. Florance said. “It wouldn’t surprise me to have 1.5 percent or 2 percent swings in the next few days.”

Stocks closed slightly higher on Friday, after a sharp sell-off earlier in the week caused by rising worries about the impact of surging borrowing costs across Europe. A big bond auction in Spain on Thursday was met with lackluster demand from investors, with yields nearing 7 percent, a record. Meanwhile, yields on Italian bonds also remained stubbornly high, finishing the week at 6.6 percent.

The rising yields increase the likelihood of a recession in Europe, and that could affect some sectors in the United States more than others, said Tobias Levkovich, Citigroup’s chief equity strategist.

“People should be selectively more nervous,” Mr. Levkovich said, noting that for the overall Standard Poor’s 500-stock group of companies, only 9 percent of revenues come from Europe. But that figure is much higher for sectors like automakers, with 30 percent of sales tied to Europe, and household and personal products at 17.5 percent and pharmaceuticals and biotechnology at 15.5 percent. Still, many sectors will be barely affected by a deeper European slowdown in terms of revenues, including telecommunications, food staples and retailing, he said.

While yields have been rising across Europe, threatening economic growth there, for the United States the key is to keep the contagion from spreading west and raising rates here.

That has not happened, Mr. Levkovich said. In the months leading to the collapse of Lehman Brothers in 2008, he noted, borrowing costs for investment-grade corporations in the United States leaped 2 percent. This time, despite the anxiety abroad, rates for big corporate borrowers have increased by less than 20 basis points, about one-tenth as much as before.

As for the special Congressional panel’s effort to find $1.2 trillion in deficit cuts by Wednesday, investors were already discounting the likelihood of a breakthrough. If the committee cannot agree on a plan by then, which seemed to be a near certainty on Sunday, the $1.2 trillion in cuts over 10 years are supposed to take effect automatically beginning in January 2013, with deep reductions in the Pentagon’s budget and domestic programs.

The markets will also be weighing the implications of elections in Spain on Sunday. Polls indicate a victory for the opposition, whose candidates are more likely to impose the austerity measures investors want. A victory by the opposition could give markets a boost, some analysts said, but this is likely to be fleeting because it does not resolve the bigger questions hanging over the euro.

Article source: http://feeds.nytimes.com/click.phdo?i=9018fa324a4d6c6edc801c35ab257e57