Bloomberg News

Spanish Bonds Slide as Minister Seeks Greater ECB Effort

April 16, 2012

Spain’s bonds declined for a second day after a minister called on the European Central Bank to buy the nation’s debt and stem the financial-market turmoil.

Ten-year yields reached a four-month high as Prime Minister Mariano Rajoy said the country must cut its budget deficit to maintain access to financing. The cost of insuring Spain’s securities against default advanced to a record, while Portuguese 10-year rates rose for an 11th day. Germany’s bund futures climbed to an all-time high as investors sought the safest assets.

“Clearly investors are again getting worried that Spain may not be able to overcome its problems without external help,” said Elwin de Groot, a market economist at Rabobank Nederland in Utrecht. “One thing that could stop this is ECB intervention but they are not extremely keen on taking that role at this point in time. Sentiment is starting to crumble.”

Spain’s two-year yield advanced 20 basis points, or 0.2 percentage point, to 3.65 percent at 4:31 p.m. London time, after jumping by as much as 30 basis points to 3.75 percent, the most since Jan. 9. The 3.4 percent note due in April 2014 fell 0.385, or 3.85 euros per 1,000-euro ($1,307) face amount to 99.52. Ten-year yields rose nine basis points to 6.07 percent after touching 6.16 percent.

Spanish Slump

Rajoy’s government is attempting to persuade voters and investors it can avoid following Greece, Ireland and Portugal in seeking a bailout. The country is due to sell as much as 3 billion euros of 12- and 18-month bills tomorrow and 2.5 billion euros of notes due in October 2014 and January 2022 on April 19.

The government’s “fundamental objective at the moment is to reduce the deficit,” Rajoy told a conference in Madrid today. “If we don’t achieve this, the rest won’t matter: we won’t be able to fund our debt, we won’t be able to meet our commitments.”

Portuguese 10-year yields increased 12 basis points to 12.68 percent. French 10-year yields gained seven basis points to 3.02 percent. Belgian 10-year yields climbed five basis points to 3.44 percent and Italian 10-year rates were seven basis points higher at 5.59 percent.

The ECB “should step up purchases of bonds,” Jaime Garcia-Legaz, a Spanish deputy minister in Luis de Guindos’s Economy Ministry, said in an interview on April 13.

Euro Weakens

The euro slid below $1.30 for the first time in two months today and credit-default swaps insuring Spanish government debt jumped 19 basis points to a record 521, according to CMA prices.

While ECB Executive Board member Benoit Coeure signaled on April 11 the central bank may buy Spanish bonds, his Dutch colleague Klaas Knot said two days later that the ECB is “very far” from reactivating the measure. The ECB’s bond buying program was put on hold a month ago after the central bank’s 1 trillion euros of three-year loans to euro-area banks in December and February gave sovereign debt from the region’s most indebted nations a boost.

Volatility in Spanish debt was the highest among euro-area debt markets, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps compiled by Bloomberg.

High Volatility

“We expect volatility to remain high also this week with investors’ mood affected by concerns about Spain and uncertainty on the evolution of the sovereign crisis,” Giuseppe Maraffino, a strategist at Barclays Plc in London, wrote in an e-mailed note. “The market’s focus in Italy and Spain is once again shifting to fundamentals.”

The difference in yield between Spanish 10-year bonds and similar-maturity German securities, Europe’s benchmark, was at 435 basis points, up from 356 basis points on March 30.

German 10-year government bond yields were two basis points lower at 1.72 percent. They reached 1.71 percent, the lowest since April 10, when the rate dropped to 1.639 percent, within a basis point of the record reached in September. The German 10- year bund futures contract expiring in June was little changed at 140.43, after rising to a record 140.51.

The technical environment is “encouraging” for bund futures contracts, Viola Stork, an analyst at Helaba Landesbank Hessen-Thueringen, wrote in an e-mailed note. There is a support zone at around 139.45 to 139.49, she wrote, and the contract should trade in a range between 139.79 and 140.70.

Support refers to a level where buy orders may be grouped.

French 10-year bond futures expiring in June were at 125.29 as they started trading today on Eurex, Europe’s largest derivatives exchange. Italian contracts slid 0.5 percent to 101.

Germany will sell two-year notes on April 18, while France plans to sell two-, three- and five-year notes and inflation- linked bonds on April 19.

German bonds returned 1 percent so far this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish debt dropped 2.1 percent, while Italy’s rallied 8.9 percent, the indexes show.

To contact the reporter on this story: Emma Charlton in London at echarlton1@bloomberg.net or Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net.

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


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