Spain places bond issue at increased 4.04%

The Spanish Treasury yesterday sold €3.52 billion of 10-year bonds at a higher rate than the last issue as investors demanded greater reward to lend money to Spain after recent debt scares.

The average yield of 4.04 per cent on the April 2020 bonds was up from 3.855 per cent during the last similar auction on March 23.

"This rate is above the average" for this type of bond, a government spokesman said, indicating investor concerns about the country's public finances. Investors submitted offers worth €7.163 billion, and the government issued less about half that amount but just slightly more than its overall target of €3.50 billion.

The Treasury on Tuesday sold €6.435 billion in 12-month and 18-month notes at sharply higher rates than two weeks previously.

Fears that Greece's debt crisis could engulf Spain and Portugal have hammered financial markets in recent months, pushing up Spanish and Portuguese borrowing costs and driving the euro to a four-year low. After Spain's public deficit swelled to 11.2 per cent of output last year, the Socialist government has committed to an austerity drive to slash the shortfall between its revenues and its spending to three per cent in 2013.

Sovereign debt bonds are issued with a fixed annual return or interest, called yield, which does not change in cash terms during the life of the bond, in this case for 10 years when the amount lent per bond is repaid. The only traded variable is the price of the bond.

As perceptions about the risk of the bond change, the price of the instrument rises or falls, automatically changing the fixed cash return as a percentage of the new price.

Spanish bonds have fallen recently, pushing up the effective yield as a percentage, and this is reflected in the rate the Spanish government has had to offer for this latest issue.