Spanish government bonds fell for the first time in three weeks on speculation the nation will struggle to fund itself after its largest region applied for financial aid.
Ten-year yields climbed the most in six weeks after Catalonia’s credit rating was cut to junk by Standard & Poor’s after the region said it would seek 5 billion euros ($6.27 billion) from a domestic rescue fund. Moody’s Investors Service said a review of Spain’s finances would be extended. Italian bonds also declined. German bunds gained for a second week as investors sought safer assets.
“Spain is moving closer to a request for a full-scale bailout,” said Alessandro Giansanti, a fixed-income strategist at ING Groep NV in Amsterdam. “Moody’s comments highlighted the risk for Spain to be downgraded to junk status,” he said.
The Spanish 10-year yield rose 44 basis points, or 0.44 percentage point, this week to 6.86 percent at 5 p.m. in London yesterday, the most since the period ended July 20. The 5.85 percent bond due in January 2022 fell 2.88, or 28.80 euros per 1,000-euro ($1,256) face amount, to 93.14.
Catalonia said on Aug. 28 it would seek almost a third of the 18 billion-euro fund created in July by the government of Prime Minister Mariano Rajoy. Valencia was the first to tap the fund with a request on July 20.
S&P lowered Catalonia’s long-term credit rating to BB, or two levels below junk, from BBB-, and said it maintained a negative outlook due to the risk the region’s credit profile would deteriorate if political tensions with the central government escalate.
Moody’s said its review of Spain’s debt rating for a possible downgrade will probably continue through September and that a possible Spanish call for further European aid may tip its credit rating to junk.
Italian 10-year bonds snapped three weeks of gains, with the yield climbing 13 basis points to 5.85 percent. German 10- year bond yields declined two basis points to 1.33 percent.
The European Central Bank meets Sept. 6 amid speculation President Mario Draghi will come up with a comprehensive plan to buy Spanish and Italian bonds to cap their borrowing costs.
Spain’s bonds dropped 3 percent this year through Aug. 30, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian bonds gained 11 percent, and Germany’s gained 4 percent.
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