-- Spain taking over the baton
-- German Schatz with negative yield at auction possible
-- New five-year BTAN from France
By Emese Bartha
Spain's borrowing costs are set to remain elevated next week as it
sells short- and longer-term debt for the first time since the
European Central Bank cut its policy rates and the government
announced a fresh round of austerity measures.
In the coming week's closely watched two-year German bond auction,
meanwhile, the yield may slip to negative territory, tracking the
secondary market.
Under a deal reached with the Eurogroup this week, Spain's government
agreed to the new austerity measures in exchange for an additional
year to reach its budget-deficit goal. Madrid now aims to cut its
budget deficit to 4.5% of gross domestic product in 2013 and to 2.8%
of GDP in 2014 after this year's gap widened to 6.3% of GDP from the
previous target of 5.3%.
"But even with these relaxed targets, achieving them could be
difficult for Spain," said BNP Paribas economists.
Rabobank's fixed-income strategists, meanwhile, said that "the obvious
danger here is that they will have the effect of furthering the
troubles of the economy and therefore much of the gains will be offset
by poorer economic growth."
Spain will sell 12- and 18-month Treasury bills Tuesday, and
government bonds Thursday. It will announce the bonds it has picked
for the sale later in the day, while the target volumes for both
tenders will be revealed Monday.
Given the high volatility in bond markets, yield moves at Spain's bond
auctions compared with previous tenders may depend on when the
corresponding bond was previously sold, even as pressure on Spanish
bonds may well remain in secondary markets.
On Wednesday, Germany will offer EUR5 billion of the 0% June 2014
treasury note, or Schatz, which is becoming increasingly expensive.
Earlier Friday it was trading at a record-low yield of -0.05%. Germany
thus may well see the lowest borrowing cost on record for this
maturity at Wednesday's auction.
So far the lowest interest rate it paid to investors on two-year debt
was 0.07% at the May 23 tender.
A negative yield, which is gradually becoming a regular pattern in the
European sovereign bond arena after being a one-off phenomenon
previously, means that investors are effectively paying the state for
the privilege for parking their money with it.
But Credit Agricole CIB credit strategist Peter Chatwell said "it
remains unclear (it is in the hands of the European Central Bank)
whether the Schatz can continue to make further significant headway
into negative-yield territory."
Short-term yields of core issuers, such as Germany, France, the
Netherlands and Finland, have fallen further after the ECB last
Thursday cut its key refinancing and deposit rates to unprecedentedly
low levels of 0.75% and 0%, respectively, to bolster economic growth
in the single-currency area, and to urge banks to provide more loans
to the real economy instead of hoarding cash at the ECB.
The week's other core issuer, France, will auction up to 10.5 billion
euros ($12.825 billion) in short- and medium-term bonds, known as
BTAN, maturing in 2015, 2016 and 2017, and in inflation-linked bonds
OATi and OATei, maturing in 2019, 2022 and 2040. The French offer
includes a new series of five-year bonds.
Write to Emese Bartha at emese.bartha@dowjones.com; Twitter: @EmeseBartha
--Tommy Stubbington in London contributed to this article.
(END) Dow Jones Newswires
July 13, 2012 06:46 ET (10:46 GMT)
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