Spain bond demand stays high as economy shrinks in Q4

Spain drew solid demand for its debt yesterday, easily shifting what it wanted to sell at a bond auction, although concerns about Greece’s second bailout and the fragility of some of the eurozone’s riskier economies pushed financing costs higher.

An auction in France also attracted good support, leaving two-year yields below 1%, showing investors continue to favour the stronger north.

Data showed underlining problems in Spain showed its economy — which is facing even more austerity — contracted in the fourth quarter for the first time in two years. By contrast, France earlier in the week reported higher-than-expected growth.

While demand at the Spanish auction was high, the average yield on a three-year offering jumped more than 47 basis points from its last outing just two weeks earlier.

“There’s pressure on the prime minister to enact more austerity, especially considering their target for this year. What with the effects of austerity and ambitious deficit targets, it’s just a reflection of the general fear that’s in the market,” strategist at 4Cast Jo Tomkins said.

The premium investors demand to hold Spanish over German debt rose to around 381 basis points, around 25 basis points from the close on Wednesday, after euro zone finance ministers failed to agree on a second aid package for Greece.

“We’ve seen the Treasury hit the maximum target for its bonds, with strong demand, which is a sign of confidence in the Spanish economy and the measures that are being taken,” said economy minister Luis de Guindos in parliament.

The economic picture, however, was grim.

Gross domestic product shrank by 0.3% in the fourth quarter on a quarterly basis after stagnating in the third quarter, final official data showed, as an economic slump which began almost five years ago dragged on.

In 2011, the economy grew by 0.7% compared with a fall of 0.1% in 2010.

The economy would be a “little worse” in the first quarter of 2012 than the last three months of last year, Economy Secretary Fernando Jimenez Latorre said yesterday, confirming expectations that Spain is already in recession.

Spain had been growing at an above-average rate since the country entered the euro monetary union 12 years ago, but the boom was largely due to a housing boom fuelled by cheap loans and the economy has struggled since the 2007 crash.

In the fourth quarter, exports were the only sector to show growth with industry surviving solely because of demand outside of Spain, though even that is slowing as the economies of its main trading partners stumble.

Meanwhile, Spain’s new government is fighting to reduce a budget deficit it has estimated at 8% of GDP in 2011 to a target of 4.4% this year.

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