Spain will face a challenge selling bonds next week after a surprise two-notch credit rating downgrade pushed yields on its debt up, pointing to higher funding costs for the fiscally-challenged sovereign.
Standard & Poor's cut Spain to triple-B plus - three notches above "junk" - citing expectations government finances will deteriorate even more as the economy contracts and as a result of an ailing banking sector.
Spain, the euro zone's fourth largest economy and current focus of the debt crisis, will sell 3- and 5-year bonds on Thursday, with market liquidity potentially hampered by European holidays next week.
Spanish 10-year bond yields tested 6 percent in early trading on Friday morning and yields were up around 15 basis points across the curve.
"Overall, it's worse for Spain for sure, but it's not necessarily the case that from here until the auction that Spanish bonds will only get beaten up."
The average yield at a February sale of Spain's January 2017 bond, which is also being offered next week, was 3.565 percent. The bond was bid with a yield of 4.924 percent in the secondary market on Friday, meaning borrowing costs are set to rise.
Sixteen billion euros of Spanish redemption and coupon payments on Monday should help support the auction however, while Italy also returns 12.5 billion euros to investors.
Spain has completed almost half of its planned 2012 funding, compared with just over 40 percent at this stage last year, according to Reuters data but evaporating investor confidence has seen a marked shift into sorter-term debt, threatening future refinancing risk.
The average maturity of debt issued by Spain so far this year is 5.17 years, almost half the 9.86 years in the same period of 2011, Reuters data shows.
France will also sell up to 7.5 billion euros of bonds next week and the sale is expected to go smoothly ahead of elections where French President Nicolas Sarkozy is on course to become the first president to lose a bid for re-election in more than 30 years.
May 01 09:30 UK Auctions 4.5% 2042 Conventional Gilt
May 02 09:10 Sweden Nominal bond auction
May 02 09:30 Portugal Eur 1.25-1.5bn new Nov 2012 & new May 2013 T-bills
May 02 13:00 3Y Notes on May 08, 10Y Notes on May 09 & 30Y Bonds on May 10
May 02 14:30 Sweden Details T-bill auction on May 09
May 03 08:30 Spain Bond auction
May 03 08:50 France OAT auction
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