Debt auctions lift markets

SPAIN and Italy spread cheer through eurozone markets yesterday with successful debt auctions at sharply lower borrowing costs, in 2012’s first real test of appetite for debt from the eurozone’s periphery.

The Spanish Treasury raised €10 billion from the auction of three bonds, double its target of €5bn, and yields dropped by about 1%.

Italy also fared well, paying less than half what it did a month ago to sell one-year bills at its first auction of the year.

Domestic banks continued to lend support thanks to ultra-cheap funding from the European Central Bank, which provided banks with nearly half a trillion euro of three-year money late last year and will make a similar offer in February.

“Basically the only reason this has been taken down so well is abundant ECB liquidity and with another one coming up in February, just for now the market seems very complacent,” said Michael Leister, strategist at DZ Bank in Frankfurt.

With the ECB money borrowed at just 1%, banks can buy government bonds with the same maturities from troubled eurozone sovereigns, exploiting the sharp difference in yields.

Spain’s risk premium, the spread between the yields on Spanish and German benchmark bonds, narrowed to its tightest level since January 3, to about 339 basis points from more than 354 basis points at Wednesday’s close. The 10-year yield spread between Italian and German bonds fell below 500 basis points for the first time this year.