Bloomberg News

Spanish Notes Lead Slump as German Yields Fall to Records

April 10, 2012

Spanish notes led a decline in the debt of Europe’s higher-yielding nations and German yields slid to records on concern a slowing global economy will deepen the region’s debt crisis.

Ten-year German bunds, Europe’s benchmark government securities, outperformed all euro-area peers on bets that European Central Bank loans are proving insufficient to stop the crisis from spreading through the region. A Swiss sale of six- month bills drew a negative yield as investors sought alternative assets to euro-area debt. U.S. and U.K. bonds rallied as stocks fell after a report on April 6 showed weaker- than-forecast U.S. job growth.

“We have a renewed concern in the euro region as the debt problem hasn’t gone away despite the liquidity support from the European Central Bank,” said Vincent Chaigneau, the global head of interest-rate strategy at Societe Generale SA in Paris. “The poor non-farm payroll data out of the U.S. only exacerbated the risk-off sentiment. Peripheral bond yields are likely to continue to rise in the near term.”

Spain’s five-year note yield jumped 31 basis points, or 0.31 percentage point, to 4.93 percent at 4:13 p.m. London time, the highest since Jan. 9. The 4.25 percent securities maturing in October 2016 fell 1.205, or 12.05 euros per 1,000-euro ($1,307) face amount, to 97.28.

The nation’s 10-year bonds dropped for a fourth day, sending the yield 23 basis points higher to 5.99 percent, the most since Dec. 12. That increased the additional yield investors demand to hold the securities over similar-maturity bunds by 33 basis points to 435 basis points.

German Records

Volatility on Spanish bonds was the highest in euro-area markets followed by Italy, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps. The change in the yield was 2.7 times the 90-day average.

Spanish 10-year yields have risen to the most since the ECB started providing three-year loans in December in its longer- term refinancing operations.

Germany’s 10-year yield fell 10 basis points to 1.64 percent, approaching its all-time low of 1.636 percent set on Sept. 23. The five-year yield declined 10 basis points to 0.617 percent, the least on record.

German two-year note yields dropped five basis points to 0.093 percent, the lowest since Bloomberg began collecting the data in 1990. The rate slid below its Japanese peer for the first time, based on closing-market data.

Spanish Banks

Spain’s government yesterday repeated its pledge to reduce the nation’s deficit to 3 percent of gross domestic product next year. Prime Minister Mariano Rajoy met health and education ministers to discuss spending cuts of more than 10 billion euros.

Spanish banks may need additional capital if the economy “worsens more than expected,” Bank of Spain Governor Miguel Angel Fernandez Ordonez said in Madrid today, as he said the recovery will be slow. If the economy “finally recovers, what has been done will be more than enough,” he said.

Treasury 10-year yields fell below 2 percent for the first time in almost one month and U.K. gilt yields for similar- maturity securities dropped to 2.01 percent, the least since Feb. 28. The MSCI World Index of shares slid 0.7 percent.

Italian 10-year yields rose 24 basis points to 5.69 percent, pushing the yield spread to bunds to more than 400 basis points for the first time since Feb. 16.

U.S. Payrolls

U.S. payrolls increased by 120,000 in March, the Labor Department said on April 6. That’s the fewest in five months and less than the most pessimistic forecast in a Bloomberg News survey. The U.S. economy is still “far from having fully recovered” from the financial crisis, Federal Reserve Chairman Ben S. Bernanke said in a speech yesterday.

Demand for bunds was also supported after a Chinese report showed import growth trailed forecasts, underscoring risks of a deeper slowdown in the world’s second-largest economy.

The French yield spread over bunds widened to as much as 136 basis points, from 125 basis points last week, the most since Jan. 18 after a report today showed the nation’s manufacturing production slid 1.2 percent in February, a third month of declines.

France sold 7.8 billion euros of bills maturing in 84, 175 and 357 days. It auctioned the 175-day bills at an average yield of 0.119 percent, compared to an average yield of minus 0.251 percent in Switzerland’s sale of 182-day government bills. Austria and the Netherlands also auctioned debt today.

German bunds returned 14 percent in the past year and 0.7 percent in 2012, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. French bonds gained 8.9 percent during the past 12 months, with Spanish securities returning 3.3 percent in the period, the indexes show.

To contact the reporters on this story: Lucy Meakin in London at lmeakin1@bloomberg.net; Anchalee Worrachate in London at aworrachate@bloomberg.net

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


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