Euro debt supply: Spanish auction to test confidence in troubled debtors

Spain will test investors' confidence in its debt-laden economy next Thursday when it tries to sell new 2- and 10-year bonds after its borrowing costs jumped at auctions last week. The insipid demand for Spanish debt gave markets a sharp wake-up call after a couple of months of growing confidence, fed by the 1 trillion euro ($1.3 trillion) wave of cheap 3-year cash pumped out by the European Central Bank since December.
Madrid raced ahead with debt issuance to cover its 2012 needs in the first months of the year, riding the wave of cash that banks seemed ready to plough back into new government bonds, but then spooked markets by raising its budget deficit target for this year.
Markets found scant relief on Thursday from an Italian auction where borrowing costs also jumped, though the rise was less than feared. Spain and Italy, the euro zone's fourth and third biggest economies, are at the heart of fears that the bloc's sovereign debt crisis could lurch into a much more dangerous phase. "We'll continue to witness the trend of the last Spanish and Italian auctions," said DZ Bank rate strategist Michael Leister.
"That is that it is getting tougher for finance agencies to meet financing needs. We see that in the primary market where they have to provide more of a concession and in the secondary market with the pressure on yield curves." Spain is still ahead of last year in covering its borrowing needs, having already completed over 45 percent of its 2012 financing compared with just under 40 percent at the same point in 2011, according to Reuters data.
Madrid's target size for its auctions will be announced on Monday but Barclays Capital anticipates 3 billion euros. "Overseas investors have been cutting exposure to Spain ... so the onus is on domestic investors to step up to the plate," said Nick Stamenkovic, rate strategist at RIA Capital Markets. "But with the impact of the ECB's 3-year funding operations starting to diminish, it's not clear there's going to be strong demand and so Spanish bonds will continue to struggle until we see some better news on the fiscal front."