Spain bond sale shows no sign of Portugal contagion

MADRID (Reuters) – Spain comfortably passed the first test of appetite for its debt after neighbor Portugal called for financial aid, selling 4.1 billion euros of bonds on Thursday.

The Treasury sold slightly above the mid-range of its 3.5 billion to 4.5 billion euro target of its 3-year bond. The average yield was 3.568 percent, just below an average yield of 3.592 percent at an auction of a different three-year bond a month ago.

Separately, France also sold 9.49 billion euros of bonds, which drew solid demand, with a bid to cover ratio for all four maturities offered well above 2.0.

In debt auctions this year Spain has managed to create some space between itself and other heavily indebted nations at the edge of the euro zone.

Investors will keenly watch the country in coming months to make sure it maintains the speed of reform work and spending cuts that have earned it favor until now. The result was welcomed by analysts as a sign that Spain had decoupled from Portugal.

“That should allay any contagion fears – they have sold a good amount at 4.1 billion and it’s come through secondary market levels with decent coverage,” said Peter Chatwell, rate strategist at Credit Agricole.

The bond saw reasonable demand with a bid-to-cover ratio of 1.8, and with bids taken by the Treasury of 7.4 billion euros.

The key risk premium on Spanish ten-year bonos and benchmark German bunds was near two-month lows on Thursday at 181 basis points, and is expected to drift lower in coming weeks as long as Spain keeps up its deficit cutting work.

“We’ve seen a spread tightening across the peripherals yesterday and reports that Portugal will ask for aid, which we believe will further stabilize the sentiment for Spain and Italy and the contagion risk will probably be reduced further,” said Michael Lester at WestLB.

Analysts also said the auction of paper in core country France went well, with good demand across the four bonds ranging from a 2020 to a 2041 bond.

“Quite good bid-to-cover ratios. Maybe one explanation is that a lot has already been priced in for the longer-dated maturities, also with regards to the ECB,” said Glenn Marci, strategist at DZ Bank.

(Reporting by Nigel Davies; additional reporting London bond desk; Editing by Toby Chopra)

Spain bond sale shows no sign of Portugal contagion