UPDATE 3-Demand for new Spanish 30-year bond falls short of January record

(Adds pricing and yield, investor comment)

By Yoruk Bahceli and Dhara Ranasinghe

LONDON, Feb 25 (Reuters) – Spain successfully placed five billion euros of 30-year bonds on Tuesday but an increasingly uncertain market backdrop cut into investor demand, keeping it well below record-high orders the government received for its January deal.

The bond sale came as Spain discovered its first case of the coronavirus on the mainland and Italy continues to grapple with its coronavirus outbreak which is likely to hit economic growth and tax revenues.

That’s caused some pain to the bond market across poorer southern European countries, with Spanish, Italian and Portuguese borrowing costs all up across the board. Still, investors placed orders of over 18 billion euros for the 30-year bond which was sold via a syndicate of banks. However that was down from the 28 billion euros announced when final pricing was first announced and was also well short of mid-January’s record order book for a 10-year bond.

That 10 billion-euro deal attracted demand of more than 52 billion euros, making it the largest-ever order book for any new debt sale in the euro zone.

“I do think the market is driving in a tight range,” said one fund manager who bought the bond.

“People don’t know how the virus will evolve and can’t easily fix recovery assumptions. So I’m not surprised they set a thin guidance threshold,” said the investor who spoke on condition of anonymity.

He noted that order books had shrunk as the spread offered to investors over mid swaps gradually tightened over the course of the day.

Mid swaps represent the average of bid/ask swap rates used for calculating the interest rate on a bond. Spain had initially guided investors towards a price of 89 basis points over mid swaps, then tightened that to 86 bps for a yield of 1.07%, lead managers said in a note seen by Reuters.

“The backdrop isn’t very conducive for a syndication this week,” said Peter McCallum, a rates strategist at Mizuho in London. “People did have a lot of cash on the sidelines for this deal, especially domestic accounts, but it’s not a perfect time given the volatility.”

The closely watched gap between Spanish and German 10-year bond yields on Tuesday widened to 73 basis points, the widest in more than two months.

Barclays, BBVA, BNP Paribas, CACIB, J.P. Morgan and Santander were the lead managers on the deal. ($1 = 0.9223 euros)

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