Spanish bond auction boosts euro

Investors showed renewed confidence in Spain today, as a government bond auction saw excessive demand.

A total of €5.64bn worth of notes were snapped up in the auction, which was targeting €4.5bn.

The Madrid-based Treasury sold three month debt on an average yield of 1.735%, a substantial decrease on the 5.11% yield seen at auction on 22 November. Six month notes were sold at 2.435%, down from 5.227% in October.

Analysts explained the drop in yield as a result of the European Central Bank moving to implement unlimited three year loans to banks later today. It is expected Spain's large banking sector will benefit from the development.

Italian bonds also gained as the ECB prepared to offer banks unlimited cash at its benchmark rate of 1% in a bid to encourage lending tomorrow. Yields on three month notes were 2.422% and 3.586% on six month notes today, according to Reuters.

The last time Spain auctioned its three month debt (on 22 November) its borrowing costs doubled as it had to pay more than Greece and Portugal, while its six month notes were sold at their highest yield since 2004 at 5.11%.

Shortly after the Spanish auction, the euro gained 0.7% to reach $1.3088 against the dollar, its highest level this week.

Meanwhile, Sweden's central bank moved to cut rates by 25 basis points, less than analysts had expected to 1.25%. The krona was up 1.1% to Skr6.8493 shortly afterwards.