Falling Portugal and Spain debt rates point to recovery

Spain and Portugal both breezed through bond auctions on Wednesday, with rates on the former eurozone laggards plunging after the ECB slashed its rates in a bid to boost growth.

Interest rates on Spain’s three- and five-year debt fell to a new record low in an auction that raised just over three billion euros, its economy ministry said in a statement.

Analysts said the drop in Lisbon’s borrowing costs could help the country to pull away from austerity faster than expected as they reduce its overall debt load.

Both countries are returning to growth after years of crippling recession sparked by the eurozeone debt crisis and are still feeling the impact of harsh austerity measures.

Bond yields for weaker eurozone countries have also fallen since the European Central Bank this month cut its three main interest rates and pushed its deposit rate into negative territory for the first time on record in a bid to fight deflation and boost growth.

“The ECB’s bundle of policy measures last week has spurred a further rally in peripheral bonds,” said Christian Schulz at Berenberg.

“The ECB has further reduced the downside risks to growth in Europe, making the periphery less vulnerable.”

Spain has now covered more than two-thirds of its annual medium and long term funding of 133.3 billion euros ($181 billion) after its latest auction, its economy ministry said.

The figures mark a stark turnaround from when it sought a 41 billion-euro rescue package in 2012 and point to add to upbeat data showing Spain’s growth picked up in the first quarter.

Madrid paid 0.876 percent on 1.525 billion euros of three-year paper, down from 0.968 percent on June 5. On the 1.551 billion of five-year debt, it paid 1.402 percent, down from 1.520 percent.

Meanwhile, Portugal on Wednesday exceeded its original target to raise 1.5 billion euros of three and 12-month debt, according to managing body the IGCP.

Portugal, crippled by the eurozone debt crisis and harsh austerity measures enforced by its international creditors, has gradually made its return to full financing on international debt markets.

Earlier this month it launched its first long-term debt auction since emerging from a three-year 78-billion-euro ($108 billion) bailout programme in May.

“The Portuguese state has seen its rates fall dramatically,” said Filipe Silva, bond strategist at Banco Carregosa.

“If the country can borrow at these rates, it may be possible to overcome the crisis sooner than expected.”

Lisbon’s year-dated paper was sold at a yield of 0.364 percent, compared to the 0.617 percent paid in May 2013, the last time it made a similar auction. The auction was 1.3 times oversubscribed.

The treasury also sold 500 million euros of three-month dated debt at 0.18 percent at an auction that was 1.6 times oversubscribed, compared to 0.432 percent last month.