Bloomberg News

Spanish Bonds Lead European Debt Lower as Demand Falls at Sale

October 20, 2011

Oct. 20 (Bloomberg) -- Spanish 10-year bonds fell for a ninth day, leading the securities of Europe’s highly indebted nations lower, as demand dropped at its first debt sale since Moody’s Investors Service cut the country’s credit ranking.

Yields on 10-year Italian debt reached 6 percent for the first time since Aug. 5 even as two people with knowledge of the transactions said the European Central Bank bought the securities. French two-year notes fell for a third day as the government sold 9.29 billion euros ($12.7 billion) of debt. German bunds fell earlier as draft guidelines for a revamped euro-area bailout fund showed credit lines may be provided for indebted countries.

“The market is going back to risk-off again,” said Thomas Meissner, head of fixed-income research at DZ Bank AG in Frankfurt. “There are also worries about the additional burden of the expanded rescue package.”

Spanish 10-year yields rose 13 basis points, or 0.13 percentage point, to 5.53 percent at 4:40 p.m. London time. The 5.5 percent bond due April 2021 dropped 0.95, or 9.50 euros per 1,000-euro face amount, to 99.72. Italy’s 10-year yield climbed 12 basis points to 6.02 percent.

The yield difference, or spread, between 10-year debt in Spain and Germany expanded 18 basis points to 353 basis points, the widest since Sept. 26.

Investors submitted bids for 1.76 times the amount of 2021 debt Spain sold today, compared with 1.9 times at the previous sale of the securities in July. The bid-to-cover ratio for the 2019 notes fell to 2.09 from 2.17 on Sept. 15, data from the Madrid-based Treasury showed today.

‘Not Encouraging’

“Not an encouraging Spanish auction,” Michael Leister, a fixed-income strategist at WestLB AG in London, wrote today in a note to clients. The auctions attracted a “lukewarm take-down” because of “negative Spain-specific news flow ahead of the auction,” he wrote.

France’s sale of 2 percent notes due September 2013 drew demand for 2.05 times the amount on offer, versus 2.66 times the previous time the debt was auctioned on Sept. 15. The government also sold debt maturing in 2014, 2015 and 2016, and issued index-linked securities due in 2016, 2022 and 2027.

France’s 10-year yield was four basis points lower at 3.17 percent, while the German bund yield was five basis points lower at 2.01 percent. The yield difference widened to 119 basis points today, the most since 1992, according to Bloomberg data.

Under Pressure

France’s Aaa credit rating is under pressure from deterioration in debt metrics and the potential for additional liabilities from Europe’s crisis, Moody’s said Oct. 17. The nation’s financial strength has weakened because of the global financial and economic turmoil, making its debt measures the weakest among its Aaa rated peers, Moody’s said.

Moody’s cut Spain’s credit rating two levels to A1 from Aa2 on Oct. 19, the third reduction in 13 months.

The enhanced rescue fund, called the European Financial Stability Facility, may be able to offer loans worth up to 10 percent of a member states’ gross domestic product in precautionary aid, the draft guidelines obtained by Bloomberg News show. The step, if approved at this weekend’s summit, may shift intolerable burdens to German taxpayers, said lawmakers from Chancellor Angela Merkel’s coalition.

‘No Agreement’

Germany’s government doesn’t rule out postponing the Oct. 23 summit due to stalling negotiations about the so-called leveraging of the EFSF, Die Welt reported, citing unidentified people close to the country’s governing coalition.

Reports of French-German differences over leveraging the euro area’s rescue fund are exaggerated, a European Union official told reporters in Brussels today on condition of anonymity. EU leaders also plan to discuss bank recapitalization during lunch at the weekend meeting, according to an official.

Fitch Ratings affirmed Belgium’s AA+ rating, with a negative outlook, saying risks continue to be skewed to the downside. Yields on 10-year Belgian debt declined three basis points to 4.42 percent.

German bonds have returned 6.7 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. French debt gained 2.6 percent, and Italian bonds lost 4.2 percent.

Volatility on Austrian sovereign debt was the highest among euro-area markets today, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps. The yield change in the nation’s 10-year bonds was 1.3 times the 90- day average, the Bloomberg gauge showed. Austria’s 10-year yield dropped six basis points to 3.03 percent.

--With assistance from Rainer Buergin and Brian Parkin in Berlin. Editors: Mark McCord, Nicholas Reynolds

To contact the reporter on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net; Garth Theunissen in London gtheunissen@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net


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