Spanish Borrowing Costs Rise at Auction of Treasury Bills as Demand Falls

Spain sold 4.66 billion euros ($6.68 billion) of bills, and its borrowing costs rose as investors increased bets Greece will restructure its debt and a euro-skeptic party increased its support in Finnish elections.

The Treasury said it sold 3.5 billion euros of 12-month bills at an average yield of 2.77 percent, compared with 2.128 percent at the previous auction on March 15. It also sold 1.15 billion euros of 18-month bills at 3.364 percent, compared with 2.436 percent in March.

Demand for the 12-month debt was 1.63 times the amount sold, compared with 2.37 last month, and the bid-to-cover ratio for the 18-month debt was 2.04, compared with 3.51. The Treasury aimed to sell a maximum of 5.5 billion euros.

Spanish 10-year borrowing costs rose for a fourth day today as investors increased bets thatGreece will restructure its debt, even as Finance Minister George Papaconstantinou said the “pain” of doing so would be worse than repaying lenders. Borrowing costs in the euro region’s periphery also rose after a Finnish party that opposes euro-area bailouts won enough support in elections yesterday to form part of a coalition government in the AAA-rated nation.

“The talk about Greek restructuring isn’t helping sentiment,” said Eric Wand, a rates strategist at Lloyds Bank Corporate Markets in London. “The bigger issue will be around the longer-dated sales, if we saw them starting to suffer.”

Spread Widens

Spain plans to sell 10-year bonds on April 20, a day before the start of the Easter holiday inMadrid. The gap between Spanish and German yields of that maturity widened to 223 basis points after the auction, from 204 basis points on April 15. That compares with a euro-era record of 298 basis points on Nov. 30, after Ireland became the second euro nation following Greece to seek a European Union bailout, and an average of 15 basis points in the first decade of monetary union. The Ibex 35 stock index fell 1.1 percent.

“The timing wasn’t ideal given all the weekend news and conditions are a bit thin due to the approaching holidays,” said Sean Maloney, a fixed-income strategist at Nomura International Plc in London. “I’m trying not to read too much into it at this stage but keeping an eye out all the same.”

While Finance Minister George Papaconstantinou said in an April 16 interview that Greece has no plans to restructure its debt, German officials have openly discussed the possibility. Last week, Finance Minister Wolfgang Schaeuble was quoted as saying “further measures may have to be taken” if Greece fails a June audit and Deputy Foreign Minister Werner Hoyer said in an interview that restructuring “would not be a disaster.”

European Central Bank council member George Provopoulos, who heads the Bank of Greece, said today a restructuring is neither necessary nor desirable. Greek two- and 10-yeargovernment bonds slumped, driving yields to the highest since the introduction of the euro.

To contact the reporters on this story: Emma Ross-Thomas in Madrid aterossthomas@bloomberg.net; Ben Sills at bsills@bloomberg.net.

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net.