Spain’s bonds fell, sending five- and 30-year yields to euro-era records, as the region of Valencia prepared to seek a rescue, deepening concern policy makers are failing to find solutions to the debt crisis.
The nation’s 10-year bonds fell for a seventh day, increasing the extra yield investors demand to hold the securities instead of German bunds to the most on record, as Spain also cut its growth forecast. The Italian-German yield gap reached the most since January and Germany’s two-year yields fell to a record. Belgian and French 10-year bond yields declined to all-time lows as investors sought higher-yielding alternatives to benchmark German debt.
“Valencia’s request for assistance underlines fears as to the central government’s ability to bring wayward regions to heel,” said Richard McGuire, senior fixed-income strategist at Rabobank International in London. “That puts Spain under a considerable degree of pressure.”
Spanish five-year yields jumped 47 basis points, or 0.47 percentage point, to 6.88 percent at 5:21 p.m. London time, after touching 6.903, the most since the euro started in 1999. The 4.25 percent note due in October 2016 dropped 1.595, or 15.95 euros per 1,000-euro ($1,216) face amount, to 90.535.
The euro fell to its lowest level since 2000 versus the yen and reached a two-year low against the dollar.
Valencia will tap Spain’s financing facility for regional governments, the area’s administration said in a statement on its website today. The funding mechanism was created last week to inject liquidity into the cash-strapped regions.
The Spanish 30-year bond yield climbed as much as 17 basis points to 7.35 percent, a euro-era record. The 10-year yield rose 26 basis points to 7.27 percent, having jumped 61 basis points this week. The euro-era record is 7.285 percent. The extra yield investors demand to hold Spanish 10-year securities instead of bunds widened to 613 basis points, the most since Bloomberg began compiling the data in 1993.
Spain faces a “death spiral” as higher yields push up borrowing costs, and that adds to concern the nation won’t be able to services its debt, McGuire said.
Euro-area finance ministers signed off on a 100 billion- euro aid package for Spanish banks today after holding a conference call, Luxembourg Finance Minister Luc Frieden told reporters today.
The cost of insuring against a default on Spanish government debt rose to the highest in a month, with credit- default swaps on the country climbing 20 basis points to 600, according to prices compiled by Bloomberg, Spain’s IBEX 35 Index of shares fell 5.8 percent, the most in more than two years.
Volatility in Spanish government debt was the highest in developed markets today, followed by Italy, according to measures of 10-year bonds, the spread between two-and 10-year securities, and credit default swaps.
The Italian-German 10-year yield spread widened to as much as 503 basis points, exceeding 5 percentage points for the first time since January.
Greek bonds also fell as the European Central Bank said marketable debt instruments backed by Greece’s government will become ineligible for the time being. The 10-year yield rose 46 basis points to 25.58 percent.
Germany’s 10-year yield fell five basis points to 1.17 percent, approaching the June 1 record low of 1.127 percent.
“As people draw their money out of Italy and Spain because they have lost faith in these economies, they tend to put it into bunds,” said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. “That’s something that boosts bunds at the expense of other markets.”
German two-year yields slipped as much as two basis point to minus 0.077 percent, an all-time low. Yields below zero mean investors who hold the debt to maturity will receive less than the amount they paid to buy them.
Belgium’s 10-year bond yields climbed two basis points to 2.47 percent, after the rate earlier fell to a record 2.391 percent. French 10-year yields were at 2.07 percent after declining to an all-time low 2.024 percent.
Yields on two-year Belgian, French, Austrian, Dutch and Finnish securities have all fallen to records this week.
“It’s not return on capital, it’s return of capital,” said Peter Allwright, who helps manage about $4 billion as the head of absolute rates and currency at RWC Partners Ltd. in London. “We are in a horrible deflationary and deleveraging world. In euros, we only want to hold Germany as it’s the best and the most liquid.”
German debt returned 4.4 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities lost 6.2 percent, and Italy’s debt rose 7.9 percent.
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