Yields drop sharply at Spanish T-bill auction

MADRID: Spain's short-term borrowing costs dropped sharply on Tuesday at an auction where the government sold 5.8 billion euros ($7.75 billion) worth of T-bills, beating its target amount, thanks to improved sentiment on weaker euro zone economies.

The Treasury sold 3.2 billion euros of a 12-month bill and 2.5 billion euros of an 18-month bill. Yields on both bills fell by more than a full percentage point. The government had aimed to sell up to 5.5 billion euros in the auction.

Sentiment toward Spain - seen as a weak link in the euro zone debt crisis due to a high deficit and economic recession - has improved in recent weeks as yield-hungry foreign investors pile in and the perception that the European Central Bank will backstop the country if it needs a bailout.

"This was a really stellar auction, yields have dropped massively.

This is part of the New Year rally we've been seeing in Italy and Spain and bodes well for Thursday's auction," said Jo Tomkins, strategist at consultancy firm 4Cast.

Immediately after Tuesday's bill sale, the yield on Spanish benchmark 10-year bonds reversed a rise, and was flat on the day at 5.05 percent.

While many investors still anticipate that Spain's government will request a bailout from the euro zone rescue fund later this year, the immediate pressure on Prime Minister Mariano Rajoy has subsided as borrowing costs come down.

At the auction, the average yield on the 12-month bill was 1.472 percent, down from 2.556 percent at the previous auction one month ago, and it was 1.687 percent on the 18-month paper, down from 2.778 percent in December.

Demand on both bills was solid, with a bid-to-cover ratio of 2.2 on the 12-month paper, versus 2.5 on the last auction and 2.7 percent on the 18-month bill, in line with the previous auction.

On Thursday, the government plans to auction up to 4.5 billion euros of bonds due 2015, 2018 and 2041.

Spain's financing needs for this year have shot up to 121.3 billion euros in gross issuance, 7.6 percent more than last year's total debt sales, due to piles of maturing debt as well as to 23 billion euros earmarked to rescue regional governments that are shut out of debt markets.