LONDON: Spanish bond prices fell on Wednesday as the euro zone's fourth largest economy readied to test market appetite for its medium-term paper as concerns over Spain's fiscal position deepen.
The Spanish Treasury will sell up to 3.5 billion euros in 2015, 2016 and 2020 paper. Borrowing costs are likely to jump at the auction with investors nervous about the country's finances even after this week's tough budget.
The auction comes a day after the government said Spain's public debt would jump this year to its highest since at least 1990, fuelling worries the country could be the euro zone's next source of contagion.
Portugal will also offer 18-month T-bills for the first time since March 2011, the month before Lisbon took a bailout from the European Union and International Monetary Fund.
"It's going to be a struggle, especially for Spain," a trader said. "I don't see any compelling reason to buy Spain at the moment."
Five-year Spanish government bond yields rose 8.2 basis points to 4.36 percent, while 10-year yields firmed 8.0 bps to 5.54 percent.
But some analysts said a recent cheapening in Spanish bond prices should help the issuance, which comes only hours before the European Central Bank announces its latest decision on interest rates.
"The net debt position of Spain is deteriorating fantastically rapidly as was highlighted yesterday... and the Spanish banking system is a massive problem," Marc Ostwald, strategist at Monument Securities, said.
But he expected the auction to go reasonably well as "there is a natural concession from the spread widening and a recent concession to make space for the supply".
The yield premium of 10-year Spanish government bonds over German equivalents has widened about 55 bps since mid March and last stood 4 bps wider on the day at 370 bps.
LOOKING FOR THE EXIT
The ECB is expected to keep interest rates at record lows of 1 percent later on Wednesday and resist German pressure to flag an exit from its crisis-fighting measures, with the euro zone recovery still fragile.
Market players said those looking to ECB President Mario Draghi's news conference for signs of when the ECB would start unwinding its loose monetary policy may be disappointed.
"I think Mr. Draghi will signal that the ECB is firmly on hold and it's too early to talk about exit strategies, given the fragility of the euroland economy and the weakness of bank lending," Nick Stamenkovic, rate strategist at RIA Capital Markets aid.
Two-year German bond yields - the most sensitive to interest rate expectations - were flat at 0.21 percent while the 10-year yield was up 2.6 bps at 1.83 percent.
The German Bund future opened nearly half a point lower after US Treasuries sold off sharply overnight when Federal Reserve minutes dampened expectations of further stimulus from the US central bank.
They came off those lows thanks partly to Asian buying of safe-haven German bonds, according to a second trader. The Bund future was last down 14 ticks on the day at 138.15.
The first trader said Bunds could still rise. "I remain a buyer in dips."
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