Spanish 10-year bond futures began trading today and risk weighing on the nation’s sovereign debt amid concern the government will struggle to redress the finances of the country’s banks and regions.
“On the one hand it helps liquidity, which has to be a good thing for Spanish debt,” said John Wraith, a fixed-income strategist at Bank of America Merrill Lynch in London. “On the other, it provides a vehicle for more easily” betting the bond price will decline, which “could lead to the futures contract dragging cash bonds cheaper,” he said.
The contract expiring in September traded at a price of 95.50 at 2:40 p.m. London time, within a range of 94.98 to 95.59. Spanish bonds fell yesterday on concern the nation’s lenders will need additional support to weather Europe’s debt crisis. The difference in yield, or spread, between the 10-year securities and similar-maturity benchmark German bunds increased to 514 basis points, or 5.14 percentage points, the most since the euro was created in 1999. The Spanish spread over 10-year Italian debt jumped to 74 basis points, the most since June 17.
Demand for alternatives to German bond futures has increased as sovereign spreads widen amid the worsening debt crisis. That’s because the securities based on bunds no longer reflect the price movements of some euro-area peers. The Spanish 10-year yield jumped 17 basis points yesterday to 6.48 percent, while the yield on the German bund slipped almost one basis point to 1.36 percent.
Spain’s 10-year yield fell five basis points to 6.43 percent today and the bund yield was little changed at 1.37 percent.
“Given how disconnected Spanish bonds trade, there is some theoretical reasoning for introducing” futures contracts, said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “It’s another example of how ‘domestic’ markets are becoming these days.”
Six institutions have committed to act as liquidity providers for the contracts, starting with Banco Popular Espanol SA, Bankia SA (BKIA), Bankinter SA and Confederacion Espanola de Cajas de Ahorros, according to Spanish derivatives market Mercado Espanol de Futuros Financieros, or MEFF.
Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA, Spain’s two largest lenders, will commence trading at a later date, MEFF said in a statement on its website.
“This sends a bit of a mixed message,” saidPeter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “What looks like a cautious approach from the bigger banks might provide an opportunity for short-term investors to take some aggressive positions, given the smaller pool of liquidity and still volatile cash market.”
Spain’s Prime Minister Mariano Rajoy said on May 16 there was a risk investors would stop lending to Spain or charge “astronomical prices” as Europe’s debt crisis deepened. Nationalized lender Bankia group said on May 25 it will seek 19 billion euros ($23.8 billion) of state support. The government is also devising a plan to help its cash-strapped regions regain access to financial markets.
Spanish government bond trading fell 9.4 percent to an average 46.2 billion euros a day in April, from 51 billion euros a day the previous month, according to a document published on the website of Spain’s Treasury on May 25.
The nation’s debt lost 2.9 percent this month, compared with a 0.9 percent decline for Italian bonds and a 2.1 percent return for German securities, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.
Eurex, Europe’s largest derivatives exchange, introduced futures for 10-year French bonds last month to help investors hedge their holdings of the nation’s securities. Trading in Italian 10-year futures started on Eurex in September 2009.
“For some time now, the German bund contract hasn’t been working as a way of managing Spanish debt,” Manuel Andrade, commercial director of MEFF in Madrid, said in a telephone interview. “Before, there was a very small spread so the bund contract worked for all the European bonds. Now the risk premium is extremely volatile so we need a contract for Spanish debt.”
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