France and Spain sold 14.6 billion euros ($18.8 billion) of bonds, with both nations’ funding costs falling in the first sale of medium and long-term debt since Standard & Poor’s downgraded their ratings.
France sold 7.97 billion euros of notes, just short of its maximum target, with the average yield on the benchmark two-year notes sliding to 1.05 percent from 1.58 percent in October. Spain sold 6.61 billion euros in bonds maturing in 2022, 2019 and 2016, more than its maximum target of 4.5 billion euros. It issued debt due 2022 at an average of 5.403 percent, down from 6.975 percent in November.
The sales came after S&P on Jan. 13 stripped France of its AAA rating and cut Spain by two levels to A. Spain has exceeded its maximum targets in all its bond auctions since Dec. 13, and demand has strengthened since the European Central Bank pumped 489 billion euros of three-year loans into the financial system on Dec. 21.
“They are both good strong auctions,” Padhraic Garvey, head of developed markets debt strategy at ING Bank NV in Amsterdam, said in an interview. “Spain is showing the market there’s ample demand for their paper. The result is perfectly in line with the sentiment we’ve see over the past couple of weeks. The ECB measures obviously help.”
The demand for Spain’s 2022 bond was 2.17 times the amount sold, compared with a bid-to-cover ratio of 1.54 in November. For the French sale it was 2.4, in line with 2011 sales.
France’s benchmark 10-year bonds yielded 3.09 percent at 11:09 a.m. London time, down from 3.13 percent on Dec. 5, when S&P warned of a rating cut. Borrowing costs fell on Jan. 16 at the French sale of 8.59 billion euros in bills, the first after the downgrade.
The Spanish 10-year benchmark yields rose to 5.25 percent, compared with 5.14 percent yesterday. They reached a 14-year high of 6.78 percent on Nov. 17.
Spain’s funding costs for four-year paper rose from an auction one week ago, even as demand increased. The 2016 debt yielded an average of 4.021 percent, up from 3.912 percent on Jan. 12. Demand for those notes was 3.24 times the amount sold, compared with 1.71 times last week.
France also sold 425 million euros of 10-year inflation linked bonds for an average yield of 1.07 percent, down from 2.32 percent on Nov. 17.
Investor demand is being stoked in part by the ECB, which has injected euros into the market by offering loans in so- called long-term refinancing operations, or LTROs. The ECB awarded 489 billion euros of three-year loans to 523 banks on Dec. 20, and banks in the region can use that cash to snap up government debt, investors said.
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.
