You can breathe a sigh of relief that Spain managed to sell a new debt issue at all, but the soaring interest rate the country had to promise buyers is a sign that worries that Spain is headed straight toward a Greek-style debt crisis are all too justified.
Yesterday, May 5, Spain sold $3 billion in five-year notes at an interest rate of 3.532%.
Doesn’t sound too bad right? Wrong.
The yield is 0.716 percentage points higher than it was when the Spanish government sold similar debt in March.
That’s a jump from 2.816% to 3.532% since March 4, an increase of 25%.
Things are likely to get worse with the next offering. Most of the buyers in this round were primary dealers who buy for their own account in the hope of selling the offering on to clients later. Speculation is that most of this offering is going to stay stuck on dealers’ books for quite a while since clients are likely to be reluctant to buy more debt that they’re worried they might have to sell into a falling market. If that’s true, and it makes sense to me, dealers will go into the next auction with sizeable positions in Spanish debt still on their books and will need even higher interest rates to persuade them to add to that risk.
The premium on Spanish debt to the benchmark German bond is already the highest on record since the introduction of the euro in 1999. Yesterday the yield spread between Spanish and German 10-year bonds stood at 1.39 percentage points.