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REFILE-EURO DEBT SUPPLY-Euro deal doubts linger over Spain auction
July 2, 2012 / 8:01 AM / 5 years ago

REFILE-EURO DEBT SUPPLY-Euro deal doubts linger over Spain auction

* Spain to issue 2015, 2016, 2022 bonds on Thursday
    * Market focus on Spain after EU agreement
    * France to issue OAT Treasury notes on Thursday
    * Core supply from Netherlands, Germany

    By Paul Day
    MADRID, June 29 (Reuters) - Doubts over the details of an
agreement by European leaders to free emergency funds to buy
sovereign debt and allow direct bank recapitalisation will hang
over European auctions next week, with supply from Spain a key
test of market faith in the accord.
    Spain will auction around 2.5 billion euros ($3.1 billion)
of three bonds on Thursday, maturing in 2015, 2016 and 2022. The
exact target sale amounts will be announced on Monday at around
1240 GMT.
    Spooked by politicians' slow progress in dealing with the
debt crisis, investors have demanded euro-era-high premiums to
buy debt issued by Italy and Spain. Spanish leaders have warned
they cannot continue to borrow at current levels for long.
    The agreement by EU leaders early on Friday to help the
Spanish and Italian governments lower borrowing costs without
enforcing greater austerity measures surprised markets, which
had expected little new from the Brussels summit.
    "There is political momentum, which is a positive for the
auction, but I think today's reaction is a bit overdone because
there will be a lot of follow through as the market tries to
assess the details," BNP Paribas rate strategist Ioannis Sokos
said.
    The deal was seen as a political victory for Italian Prime
Minister Mario Monti and his Spanish counterpart, Mariano Rajoy,
over German Chancellor Angela Merkel, who had said there was no
need for emergency measures earlier this week.
    Leaders under pressure to prevent a breakup of the single
currency also pledged to create a single euro zone banking
supervisor, a landmark step towards a European banking union.
  
    Spanish and Italian debt rose sharply in value on the
secondary markets on Friday, trimming yields on both countries'
benchmark 10-year bonds by around 40 basis points on the day. 
    "It really depends on what comes out in the next few days.
Right now there is intense uncertainty," a Madrid-based fixed
income trader said. "The fall ... in the (Spanish) 10-year
benchmark yield is normal after yesterday's announcement, but
the question is whether it's sustainable."
    While the accord says new austerity measures will not be
forced on nations using the new mechanism, Merkel said
conditionality would still apply, the trader noted - a lack of
clarity that could temper market enthusiasm for the deal.
    Spain's Treasury, which has already raised more than 61
percent of its 2012 gross issuance goal, will hold 12 more bond
auctions this year from which it must raise 33.3 billion euros,
or an average of just under 2.8 billion euros an auction.
    The government made the most of a flood of cheap loans from
the European Central Bank at the beginning of the year,
front-loading its issuance plans to coincide with the ECB's
trillion euro two-stage Long-Term Refinancing Operation (LTRO).
    Since March, Madrid has raised an average of just 2.4
billion euros at each bond auction as the positive effect of the
ECB's December and February liquidity injections has faded. 
    Markets have been less demanding of Italy, which does not
plan to sell bonds next week, but pressure on technocrat premier
Monti has ramped up in the last week, with Rome's benchmark
borrowing costs hitting six-month highs on Thursday.
    Markets want Monti to follow through on reforms to spur
economic growth that will help Italy tackle the world's
fourth-largest debt pile.
    "The measures announced (by EU leaders) are short on detail,
full of loose ends and of limited benefit to Spanish and Italian
sovereign debt," said Nicholas Spiro of Spiro Sovereign Strategy
in London. "The rescue funds' capacity to purchase government
debt is very limited and, even with leverage, not credible
enough to turn around sentiment." 
      
    CORE ISSUES
    While market attention in the wake of the European accord
will be focused on periphery countries' debt, one of the euro
zone's triple-A-rated core economies the Netherlands will also
offer a minimum 4 billion euros of new five-year bonds. 
    The bloc's economic powerhouse and paymaster Germany, whose
perceived status as a safe haven has seen investors accept
negative real interest rates to hold some of its debt, will
meanwhile auction four billion euros of five-year bonds.
     The sale should be helped by around 40 billion euros of
German coupon and redemption payments. 
     Bunds slipped on Friday as Spanish bonds rallied, with
10-year German yields 10 bps higher at 1.61
percent, having briefly risen above those of their U.S.
counterparts for the first time since early February.
    The euro's second-biggest economy France will auction
between 7 billion and 8 billion euros of OAT treasury notes the
same day as Madrid taps the market.   
    "The appetite for core bond markets will be pretty
significant (to see) after the positive surprise from the EU
summit," rate strategist at RBS Harvinder Sian said.
    "I think they'll clear okay, but the most focus will be on
the Spanish auction and how well the market sees appetite for
Spanish bonds post-EU summit."

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