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Spanish bonds fell, pushing five- and 10-year yields to euro-era records, as the nation’s borrowing costs rose at an auction amid concern its banks’ and regions’ debts will force it to seek a sovereign bailout.
Italy’s 10-year bonds declined for a third day after services and manufacturing in the euro region shrank in July. Germany’s bunds sank, pushing up yields from near all-time lows, after Moody’s Investors Service cut the outlook on the nation’s top rating citing concern it will have to support weaker euro- region members. Government debt from the Netherlands fell as its outlook was also lowered by Moody’s, along with Luxembourg.
“It’s a desperate situation” for Spain, Robin Marshall, who helps oversee the equivalent of $19 billion as director of fixed income at Smith & Williamson Investment Management in London, said in an interview on Bloomberg Television’s “The Pulse” with Caroline Hyde. “Markets are slowly closing to them so I don’t think there’s much doubt they’ll need an international package at some point soon.”
Spain’s 10-year yield rose eight basis points, or 0.08 percentage point, to 7.58 percent at 3:22 p.m. in London after climbing to 7.625 percent, the highest since November 1996. The 5.85 percent bond due in January 2022 dropped 0.505 or 5.05 euros per 1,000-euro ($1,209) face amount, to 88.51. The yield jumped 23 basis points yesterday.
The Spanish five-year rate increased as much as 16 basis points to 7.57 percent.
Spain sold 3.05 billion euros of bills today, including 84- day securities at a yield of 2.434 percent, compared with a rate of 2.362 percent at an auction on June 26.
The nation’s government hasn’t ruled out leaving the euro and is considering options including an international bailout or default, El Confidencial reported, citing unnamed sources close to Prime Minister Mariano Rajoy. Spain’s Economy Minister Luis de Guindos will visit Berlin today for crisis talks with German counterpart Wolfgang Schaeuble.
The German 10-year yield rose eight basis points to 1.25 percent, after matching its June 1 record low of 1.127 percent yesterday. The Dutch 10-year yield climbed 12 basis points to 1.76 percent.
“The closer we get to a larger bailout for Spain, the more it will start to weigh on bunds,” said Allan von Mehren, a fixed-income strategist at Danske Bank A/S (DANSKE) in Copenhagen. “The situation for Spain is unsustainable and it’s just a matter of time before we see some kind of intervention.”
Moody’s changed the outlooks on the Aaa credit ratings for Germany, the Netherlands and Luxembourg to negative yesterday, citing an “increasing likelihood” of collective support for countries such as Spain and Italy.
“If we are to see a credible resolution to the crisis it will inevitably mean a material increase in contingent liabilities for the core countries,” said Brian Barry, an analyst at Investec Bank Plc in London.
Hajime Nagata, who helps oversee the equivalent of $124 billion as a bond investor at Diam Co. in Tokyo, said he’s sticking with his bet on German bunds.
“I don’t care” about the outlook cut, he said. “If we move away from German bunds, where are we going to put the money? If we see a drop in German bunds, that’s a time to add.”
The German 10-year bund futures contract expiring in September fell as much as 0.7 percent to 144.51.
Bunds are “under pressure,” Richard Adcock, head of fixed-income technical strategy at UBS AG in London, wrote in a note to clients. After falling below a level of so-called support at 144.83, the contract may drop to as low as 143.76, he wrote, citing trading patterns. Support refers to an area where buy orders may be grouped.
Volatility on Dutch bonds was the highest in euro-area markets today followed by Belgium, according to measures of 10- year debt, the spread between two- and 10-year securities and credit-default swaps.
A composite index based on a survey of purchasing managers in both industries in the 17-nation euro area was unchanged at 46.4, the same level as in June, London-based Markit Economics said. A reading less than 50 indicates contraction.
Italy’s 10-year bonds dropped, pushing the yield as much as 24 basis points higher to 6.58 percent, and the nation’s nine- year rate climbed above that on similar-maturity Irish debt today. The yield premium investors demand to hold the Irish bonds reached as much as 993 basis points in July 2011, according to generic yield data compiled by Bloomberg. Ireland doesn’t currently have a 10-year benchmark.
Italy’s two-year note yield climbed to more than 5 percent for the first time since January.
Credit-default swaps on Spain rose 12.5 basis points to a record 644, according to data compiled by Bloomberg.
The risk of Spanish bonds being cut to non-investment grade status “remains high,” according to Royal Bank of Scotland Group Plc. Moody’s rates Spain Baa3, one step above junk. Standard & Poor’s has a negative outlook on Spain’s BBB+ rating, which is three levels above junk, and Fitch Ratings ranks the nation at BBB, two steps above non-investment grade.
“It is hard to envisage Spain eventually escaping a full bailout,” Brian Mangwiro and Giles Gale, strategists at RBS in London, wrote in a research report today. They said investors should sell the debt of so-called periphery nations’ such as Spain, and buy higher-rated “core fixed-income risk.”
German debt returned 4.5 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities lost 9 percent, while Italy’s rose 5.6 percent.
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