Spanish Debt Woes Continue, Yields Rise at Auction

Spanish bond yields rose at auction Thursday, as renewed fears over the nation's finances sent yields higher. Yields had been fallen for four straight trading days after the European Summit revealed that the Spanish Government would not be liable for the bailout of the nation's banking sector.

Spain held three separate debt auctions totaling 3.001 billion euros, one of three-year maturity bonds, one of four-year bonds, and one of ten-year bonds. The results were:

Sold 1.239 billion euros of 3-year bonds, bid-to-cover 2.3 vs. prior 3.2, yield down to 5.086 percent the previous 5.457 percent.

Sold 1.015 billion euros of 4-year bonds, bid-to-cover flat at 2.6, yield 5.536 percent from previous 5.353 percent.

Sold 747 million euros of 10-year bonds, bid-to-cover 3.2 vs. prior 3.3, yield 6.43 percent from previous 6.044 percent.

The rise in yields is not good for Spain. Benchmark Spanish 10-year bond yields continued to climb in the secondary market after the auction, with yields reaching 6.84 percent. In June, Spanish bonds fell from a high of 7.16 percent to 6.25 percent as European leaders agreed on a new set of crisis fighting measures. However, fears that the subordination of private bondholders in a restructuring were resurrected today. Traders reacted by selling bonds, sending yields higher.

France also auctioned bonds on Thursday, also seeing yields rise. France auctioned 10-year bonds and 7-year bonds as yields rose to 2.53 percent from 2.46 percent on the benchmark 10-year. However, French 10-year bonds rallied after the auction and yields fell to 2.498 percent.

The rise in Spanish borrowing costs is worrisome for the future of the European Monetary Union. Leaders had hoped that last week's new measures would work to cap borrowing costs for indebted nations such as Spain and Italy. If yields continue to rise in the secondary market, it may be that traders want a larger program launched by either the leaders or the European Central Bank that specifically targets bringing down borrowing costs of peripheral nations.

Overnight, data is set to be issued detailing the state of the economy in Spain. Industrial production, a broad measure of economic health, is expected to have fallen 8.8 percent annualized in June, as compared with the prior reading of an 8.6 percent contraction. Should there be a rebound in industrial production and a beat of estimates, Spanish bonds may rally sending yields lower and Spanish stocks might as well.