MARKETS-GLOBAL-SPAIN-EUROZONE:European shares unimpressed by Spanish debt sale
By Richard Hubbard
LONDON (Reuters) - Solid demand at Spain's bond sale on Thursday briefly lifted the euro and European shares, but the gains were curbed due to wider concerns over the government's ability to tackle a ballooning deficit as its economy shrinks.
Spain's Treasury issued the full 2.5 billion euros of two- and 10-year bonds it planned at the auction but was forced to pay more for the longer-dated paper than at a previous sale in January, suggesting that investors were not convinced by the government's spending cuts and reforms.
"The bigger story for Spain remains one of fiscal position and growth," said Nick Stamenkovic, bond strategist at RIA Capital Markets.
"Until we see signs that the government is implementing the medium-term fiscal consolidation programme and signs of life in the Spanish economy, investors are going to worry."
Many investors are concerned about the euro zone's ability to prevent Spain's fiscal woes from spreading to other vulnerable economies in the 17-member bloc.
After the auction, existing Spanish government debt yields rose, with the 10-year bonds up 4 basis points at 5.89 percent, compared with the average yield achieved at the auction of 5.743 percent.
Italian bond yields were also pulled higher as investors looked ahead to supply from Rome next week. Italian 10-year yields were 6 basis points higher at 5.55 percent.
Meanwhile France was able to sell nearly 8 billion euros of new medium- and longer- term bonds at yields broadly comparable to similar debt in the market. It received bids for nearly three times the amount offered.
Analysts said the outcome of the French auction reflected in part efforts by Socialist candidate Francois Hollande to ease market fears about his policies if he is successful in the two-round presidential election that starts on Sunday.
"We've seen a bit of a concession in the past few weeks as investors fret about a shift in policy under the helm of Hollande if he gets into power," Stamenkovic said.
But price action in the euro against the dollar, German government bond futures and across the share markets was fairly muted, reflecting a sense that a major hurdle had been cleared rather than any real change in sentiment.
The euro briefly rose to $1.3166 after the debt auction results before edging back to be almost flat on the day at $1.3129.
German Bund futures were also little changed at 140.36, erasing earlier losses with one analyst citing the fact the auction was priced below the secondary market.
Fears over the euro zone returned after the second of two large liquidity injections by the European Central Bank, which added 1 trillion euros into the banking system, as the market began factoring in a slower growth outlook and worries grew over the willingness of politicians to implement austerity measures.
"Spain has supplanted Italy as a proxy for euro zone risk," said Nicholas Spiro, managing director of Spiro Sovereign Strategy, a London-based credit risk consultancy.
"In the past month or so, perceptions of Spain's creditworthiness have deteriorated markedly - not because of any new information but because investors believe the Spanish economy is caught in a vicious circle."
Global shares barely reacted to the debt sale news with the MSCI world equity index little changed, up 0.15 percent at 326.91, after uninspiring earnings from tech bellwethers IBM
In the oil market Brent crude oil extended its gains after the Spanish bond auction to be up nearly $1 a barrel at $118.96.
Good economic data from the United States would see funds pushing back into oil, and markets will be closely watching weekly claims for jobless benefits at 1230 GMT, which are forecast to fall to 370,000, compared with 380,000 in the prior week.
(editing by Elizabeth Piper)