Spain opts for cautious debt sale plan

LONDON: Spain will limit bond sales next week to short-dated debt in its battle to keep progressing toward this year's funding target while policymakers lay the groundwork for a bailout request.
Madrid opted to sell bonds with a maturity of two-, three- and five-years, rather than go ahead with an overdue 10-year benchmark in a move that analysts said reflected the huge uncertainty surrounding the debt-laden, recession-hit country.
"The Spanish Tesoro is playing it very safely, especially given the headline risks over the next couple of days. This is the safest bet the Tesoro could make," said Norbert Aul, strategist at RBC Capital Markets in London.
A review of Spain's credit rating, due to be concluded by before markets open on Monday, could see it downgraded below investment grade and an audit of its banks is expected to show they need around 60 billion euros to return to health.
The banking review, along with a tight budget revealed on Thursday, is seen paving the way for an official aid request that would then activate a bond-buying program by the European Central Bank designed to lower the country's borrowing costs.
But there has been no sign Madrid is in a hurry to make that request and the risk is that market pressure will continue to mount until it does.
Spanish 10-year yields currently stand at 6 percent , well above most of their euro zone peers, whereas two-year bond yields sit at a more palatable, but still high, 3.5 percent.
The prospect of ECB support, which applies to debt with maturities up to three years, has helped lower short-term costs and is likely to ensure that buyers still turn up to the auctions, but it may not be sufficient to allow much five-year debt to be sold.
"For the shorter-dated bonds we expect decent demand simply because the ECB may enter the market after Spain makes an (aid) application ... but for the five-year it could be weaker than last time," UBS rate strategist Gianluca Ziglio said.
Spain has raised 68.6 billion euros at auctions this year but is estimated to need another 17 billion euros to meet its funding target, with 20 billion euros of redemptions due next month adding to the pressure to keep selling debt.
Volatile markets, with most international investors still steering clear of Spanish bonds, have forced Spain to rely on issuing short-term debt — an unhealthy trend that increases exposure to volatility via the need to hold regular auctions.
"At the moment it is more about advancing toward their funding target. The 10-year benchmark is now overdue for several months and a launch will depend on improving market conditions. However, it's not only the 10-year — the entire funding structure of Spain is not what it used to be anymore," Aul said.
Elsewhere, France will issue debt worth up to 8 billion euros of bonds, including the launch of a new 10-year benchmark and a tap of the ultra-long April 2041 issue.
Credit Suisse recommend short positions in French debt versus German paper on the grounds that central bank support is insufficient to keep markets calm over Spanish and Greek risks, and that France would suffer in any move into ultra-low risk assets.
The spread between 10-year French and German bonds
has widened 16 basis points to 79 basis points in the last two weeks and Credit Suisse said next week's auction may be a chance to book some profits. Bond yields typically rise before a new issue hits the market.