Spain bond auction sees strong demand

Gustavo Bagattini, RBC Capital Markets: Spain has "pre-funded about half of all their debt for this year"

There was relief at the result of Spain's bond auction on Thursday, in which there was strong demand, even though some borrowing costs rose.

The 10-year bonds were sold at a yield of 5.743%, up from 5.403% when the bonds were last sold in February.

But the rate for two-year bonds dropped to 3.463% from 3.495% in October.

Spain sold all the 2.54bn euros ($3.33bn; £2.08bn) of bonds it was offering, with demand higher than at the previous sale.

The demand for the 10-year bonds was almost twice the amount sold.

"Overall, then, a reasonable set of results which will go some way to allaying fears the domestic bid [demand] for Spanish bonds has dried up," said Richard McGuire, rate strategist at Rabobank.

But he added that: "This support does come at a price".

There had been worries about this week's bond auctions after the interest rates on existing 10-year bonds rose above 6% on Monday.

Borrowing costs above 6% are considered by many analysts to be unaffordable in the long run.

Demand for 10-year bonds was almost twice the amount sold

Spain held a short-term bond auction on Tuesday at which the rate for 12-month bonds rose to 2.6% from 1.4% at the last auction in March, while 18-month bonds were up from 1.7% to 3.1%.

Analysts said that Spain had passed the hurdle of this auction, but that the challenges for the economy remain.

"Until we see signs that the government is implementing the medium-term fiscal consolidation programme and signs of life in the Spanish economy, investors are going to worry about the trajectory of the debt-to-GDP ratio in the medium-term," said Nick Stamenkovic, bond strategist at RIA Capital Markets.

French demand

France also held bond auctions on Thursday, selling 10.5bn euros in medium-term debt, with some of its borrowing costs edging up.

The yield on five-year bonds rose to 1.83% from 1.78% at the previous auction.

There were no figures to compare the other bonds sold, with two of them being new instruments that had not previously been sold.

There was considerable demand for the bonds, with auctions being oversubscribed by between 1.7 and three times.