Bloomberg News

Spanish Bonds Decline After Catalonia Applies for Financial Aid

September 01, 2012

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.

Catalonia Rating

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.

To contact the reporter on this story: Neal Armstrong in London at narmstrong8@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net


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