Interest rate up sharply in key Spanish bond sale

[December 16, 2010]  MADRID (AP) -- Spain had to pay sharply higher interest rates Thursday to borrow euro2.4 billion ($3.21 billion) from bond markets, despite strong demand, as investors were wary of a possible downgrade.

The central bank said the treasury sold euro1.8 billion in 10-year bonds at an average interest rate of 5.4 percent, up from 4.6 percent in the last such auction Nov. 18. It was obliged to pay a rate of 6 percent to sell euro618 million in 15-year bonds, up from 4.5 percent in October.

Demand was strong, however, almost double the amount on offer for the 10-years and almost triple the sum for the 15-years.

"The auction result has been disappointing in terms of funding costs but largely in line with market expectations," said UniCredit analysts in a note to investors.

Interest rates at Spanish bond sales have soared in recent months amid market speculation the country may need emergency financial help because of its heavy debt burden and its slow recovery from recession.

The government has continually defended the economy, denied the need for help and says it is taking the necessary measures to handle its debt and trim its swollen deficit.

The sale came as European Union leaders were gathering for a summit focusing on the debt crisis and new rules to avoid similar market turmoil in the future.

Ratings agency Moody's warned on Wednesday it may downgrade Spain's debt because the country could face a borrowing crunch next year. The agency, however, said it not believe the government's solvency was in question or that it would need a bailout.

Madrid's main stock index was flat in morning trading after the bond sale. On the secondary market, Spain's 10-year bonds had yields of 5.5 percent, down slightly from Wednesday. This made for a spread of 2.5 percentage points above the benchmark German 10-year bond but still below the euro-era record difference of 3.05 percentage points hit earlier this month.

[Associated Press; By CIARAN GILES]

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