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Spain, Italy Bonds Drop on Spanish Rating Cut; Bunds Rise

April 27, 2012

Spain’s bonds fell, with two-year note yields rising the most in almost two weeks, after Standard & Poor’s cut the nation’s credit rating and as a report showed the unemployment rate jumped to an 18-year high.

German note yields reached a record low as concern the European debt crisis is worsening spurred demand for the region’s safest government securities. Dutch notes rose as the government struck a deal with the opposition to meet European Union budget rules. Italian bonds were little changed as the nation’s borrowing costs increased and it raised less than its maximum target at a debt auction.

“After the rating cut there was a sell-off in the periphery and stronger demand for bunds,” said Mohit Kumar, head of euro-area rates strategy at Deutsche Bank AG in London. “The auction results are reasonable, given the volatility in the market.”

Spain’s 10-year yield rose five basis points, or 0.05 percentage point, to 5.88 percent at 5 p.m. London time after climbing as high as 6 percent. The 5.85 percent bond due January 2022 declined 0.355, or 3.55 euros per 1,000-euro ($1,323) face amount, to 99.77.

The two-year note yield increased two basis points to 3.28 percent after rising as much as 22 basis points, the biggest intraday gain since April 16. The yield is up 75 basis points this month.

Rating Cut

S&P lowered Spain’s long-term credit rating by two steps to BBB+ from A, with a negative outlook, citing concern the nation will have to provide further fiscal support to banks. Spanish 10-year yields have climbed more than 80 basis points this year as Prime Minister Mariano Rajoy struggles to quash investor speculation the nation would need outside aid.

Credit-default swaps insuring Spanish debt against default for five years advanced five basis points to 473 basis points.

Italy’s 10-year bond yields climbed as much as 13 basis points before ending trade little changed at 5.64 percent. French 10-year yields increased two basis points to 3 percent.

Italy raised 5.95 billion euros from today’s debt sale, less than its maximum target of 6.25 billion euros. The nation sold 2.5 billion euros of a 10-year benchmark at a yield of 5.84 percent, up from 5.24 percent at the previous auction on March 29. Investors bid for 1.48 times the amount offered, versus 1.65 times last month.

The Treasury sold 2.42 billion euros of five-year notes at 4.86 percent, compared with 4.18 percent last month. It also auctioned securities due in 2016 and 2019.

German Bunds

German two-year yields were little changed at 0.10 percent, after falling to a record 0.075 percent. Five-year yields dropped one basis point to 0.64 percent. They earlier declined to an all-time low of 0.595 percent. The 10-year yield rose two basis points to 1.70 percent.

“Sentiment is deteriorating and part of that story is of course the outlook for Spain, and the rating downgrade doesn’t help at all,” said Elwin de Groot, a market economist at Rabobank Nederland in Utrecht. “The short-end yield levels we are seeing in Germany are almost zero, it’s crazy.”

Spain’s jobless rate climbed to 24.4 percent in the first quarter from 22.9 percent in the previous three months, the National Statistics Institute said.

Spanish Economy Minister Luis de Guindos ruled out seeking a bailout. “Nobody has asked Spain, either officially or unofficially” to turn to Europe’s bailout mechanisms, he said in Madrid yesterday in a Bloomberg News interview.

Dutch Notes

Dutch notes advanced for a fourth day as Prime Minister Mark Rutte and Finance Minister Jan Kees de Jager reached a deal with the opposition and got a majority backing on an austerity package to meet the nation’s budget deficit target.

The two-year yield dropped one basis point to 0.39 percent after rising as high as 0.55 percent on April 25.

The deal “is likely to remove the Netherlands from the market’s spotlight in the short term,” Francois Cabau, an economist at Barclays Plc in London, wrote in note today. Still negotiations after elections in September could be lengthy “and return the country into the spotlight,” Cabau wrote.

German bonds returned 1.2 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spain’s have lost 1.1 percent, and Italy’s securities gained 8.8 percent.

To contact the reporters on this story: Emma Charlton in London at; Lukanyo Mnyanda in Edinburgh at

To contact the editor responsible for this story: Daniel Tilles at

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