Bloomberg News

Spanish, Italian Bonds Decline as Economic Confidence Wanes

January 07, 2012

Jan. 6 (Bloomberg) -- Spanish and Italian bonds declined as European confidence in the economic outlook fell to a two-year low, fueling concern that the region’s most-indebted countries will struggle to cut budget deficits amid a slowdown.

Spain’s 10-year yields had the biggest weekly increase in almost 17 years. The unemployment rate among the nation’s young people rose to 49.6 percent in November, the European Union’s statistics institute said today. French 10-year bonds slipped for an eighth day, yielding more than the European bailout fund in which the country is a main guarantor. German bonds posted a weekly decline as stocks advanced and U.S. employers added more workers to payrolls in December than predicted by economists.

“The data was weak, reflecting the drag on euro-zone economies from the debt crisis,” said Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London. “Bunds are taking their cue from the more positive U.S. data.”

Spain’s 5.5 percent bond due April 2021 fell for a fifth day, pushing the yield up seven basis points, or 0.07 percentage point, to 5.71 percent at 4:46 p.m. London time. The yield is 62 basis points higher this week, the biggest advance since August 1994, according to data compiled by Bloomberg.

The yield on Italy’s 10-year bond rose four basis points to 7.13 percent, after rising to 7.18 percent, the highest since Nov. 30. The bonds fell even as the European Central Bank was said to be buying the countries’ debt securities.

Sentiment Gauge

An index of executive and consumer sentiment in the 17- nation euro area fell to 93.3 in December from a revised 93.8 the previous month, the European Commission in Brussels said today. That’s in line with the median of 19 economist estimates in a Bloomberg survey. The unemployment rate held at 10.3 percent in November, a separate report showed.

Spain’s overall unemployment rate was 22.9 percent, the highest in the EU and the most on record for the country, up from 22.7 percent in October, Eurostat said.

The extra yield, or spread, that investors receive for holding Italian and Spanish 10-year bonds instead of bunds also rose as ECB Governing Council member Klaas Knot said Germany was the “most important obstacle” to raising the region’s bailout fund limit. French 10-year bonds posted their longest run of declines since June 2006.

Austrian 10-year yields climbed to the highest since Dec. 1 after Hungary’s credit grade was cut to junk by Fitch Ratings.

‘Concern Lurking’

“There is obviously some concern lurking around, with sovereign debt downgrades hanging over a lot of countries,” said Eric Wand, a fixed-income strategist at Lloyds Bank Corporate Markets in London. “The market is continuing to punish peripherals.”

The French 10-year yield increased two basis points to 3.37 percent, climbing for an eight consecutive day. The yield on the European Financial Stability Facility’s 3.375 percent bond due in July 2021 was at 3.19 percent today. The EFSF owes its top credit ratings to guarantees from nations including France.

“The market is saying the risk of France going bust is greater than the EFSF,” Michael Riddell, a London-based fund manager at M&G Investments, said by e-mail. “France is one of the main guarantors and the EFSF can’t work without it, so this distortion fundamentally shouldn’t happen.”

The 10-year bund yield climbed three basis points this week to 1.86 percent. It rose as much as four basis points immediately after the U.S. payrolls data was published today.

U.S. Payrolls

German bonds are little changed this year, after gaining 9.7 percent in 2011, the most since the financial crisis of 2008, according to indexes compiled by Bank of America Merrill Lynch. The 10-year yield has increased from a record low 1.636 percent in September, as reports signaled that Germany is sustaining its economic recovery.

The 200,000 increase in U.S. payrolls followed a revised 100,000 gain in November that was smaller than initially estimated, Labor Department figures showed in Washington. The median projection in a Bloomberg News survey called for a December gain of 155,000. The unemployment rate fell to 8.5 percent, the lowest since February 2009.

Volatility on Swiss sovereign debt was the highest in Europe today, followed by Norway, according to measures of 10- year bonds, two- and 10-year yield spreads and credit-default swaps. Neither of the countries are members of the euro area. Ireland had the biggest swings in the currency bloc.

The Stoxx Europe 600 Index gained as much as 0.9 percent today. For the week, it’s 1.2 percent higher. The Standard and Poor’s 500 Index was little changed for the day and up 1.9 percent since Dec. 30.

--With assistance from Emma Ross-Thomas in Madrid, Svenja O’Donnell in London and Timothy R. Homan in Washington. Editors: Mark McCord, Matthew Brown

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net; David Goodman in London at dgoodman28@bloomberg.net

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


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