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Spain’s government bonds fell, with 10-year yields rising the most in almost eight weeks, after top- rated European countries said national authorities should bear the cost of earlier losses in their banking industry.
Italian and Irish securities also declined as Germany, the Netherlands and Finland said late yesterday the region’s bailout fund, the European Stability Mechanism, should assume only a limited burden in bank recapitalizations. Spanish bonds dropped for a second day after Catalan President Artur Mas called for early elections in a bid to seek greater regional autonomy. German bunds advanced even as the nation attracted fewer bids than its target at a 10-year debt sale.
“There’s an ongoing drip feed of negative news,” said Richard McGuire, a fixed-income strategist at Rabobank International in London. The ESM announcement “appears to cast some doubt as to whether Spain will be able to disburden itself of the liabilities it will assume via its banking bailout.”
Spain’s benchmark 10-year yield climbed 32 basis points, or 0.32 percentage point, to 6.06 percent at 4:06 p.m. London time, the biggest increase since Aug. 2. The 5.85 percent bond due January 2022 fell 2.225, or 22.25 euros per 1,000-euro ($1,284) face amount, to 98.47.
Bank recapitalization “should take place based on an approach that adheres to the basic order of first using private capital, then national public capital and only as a last resort the ESM,” Finance Ministers Wolfgang Schaeuble, Jan Kees de Jager and Jutta Urpilainen said in a statement distributed by the Finnish Finance Ministry. That may rule out the bailout fund from being used to deal with the 100 billion euros in aid Spain sought for its banks in June.
The statement only referred to “general principles,” a spokesman at the Dutch Finance Ministry said by telephone today.
German bunds rallied, with the 10-year yield falling 13 basis points to 1.46 percent after dropping as much as 14 basis points, the biggest decline since Aug. 2.
Germany received bids of 3.95 billion euros for the 10-year bunds it sold today, falling short of the 5 billion-euro goal. It’s the second consecutive 10-year auction that has attracted less demand than its target.
Bids were “very sluggish,” Annalisa Piazza, a fixed- income analyst at Newedge Group in London, wrote in a note to clients. “Dealers might see limited upside for German debt in the coming week,” she said.
The bonds were sold at an average yield of 1.52 percent, compared with 1.42 percent at the previous auction on Sept. 5.
The sale highlights “weakening investor interest” in bonds with a maturity longer than five years, German Finance Agency spokesman Joerg Mueller said in an interview.
Spanish Prime Minister Mariano Rajoy told the Wall Street Journal in comments confirmed by his office that he would “100 percent” ask for a sovereign bailout if his nation’s borrowing costs stayed “too high for too long.”
Rajoy’s comments were “like a red rag to a bull in terms of the market needing to strong-arm Spain into accepting aid,” Rabobank’s McGuire said.
The extra yield that investors demand to hold Spain’s 10- year bonds instead of similar-maturity German bunds widened 45 basis points to 461 basis points, the most since Sept. 6.
Spain’s two-year yield jumped 27 basis points to 3.44 percent, the most since Sept. 4.
Spanish 10-year yields are still below the euro-era record 7.75 percent reached on July 25, 2012. They have averaged 5.87 percent over the past year.
Mas’s bid for greater autonomy for Catalonia came a week after Rajoy rejected his demand for increased control of the region’s revenue. Mas yesterday set the vote for Nov. 25, saying the time has come to seek “self-determination.”
Thousands of protesters gathered around the Parliament in Madrid late yesterday to oppose budget cuts and tax increases Rajoy has pursued since coming to power in December in breach of his campaign pledges.
“The negative news flow on Spain is gaining momentum,” said Michael Leister, a fixed-income strategist at Commerzbank AG in London. “The protests will definitely add to the pressure, but negative news regarding the regions pose a bigger risk” to Spanish borrowing costs, he said.
Italy’s 10-year yield rose 10 basis points to 5.20 percent, and the two-year yield also climbed 10 basis points, to 2.43 percent. The nation sold 9 billion euros of bills.
Volatility on German bonds was the highest in euro-area markets, followed by Finland, according to measures of 10-year or equivalent-maturity debt, the spread between two- and 10-year securities and credit-default swaps.
Irish bonds due in October 2020 dropped for a second day, with the yield rising 13 basis points to 5.17 percent.
The statement by the German, Dutch and Finnish Finance Ministers “will come as a disappointment to the Irish government, who have been hoping for a significant element of ‘relief’ to their overall debt sustainability,” said Owen Callan, an analyst at Danske Bank A/S (DANSKE) in Dublin.
German bunds were also boosted as the Federal Statistics Office in Wiesbaden said annual inflation slowed to 2 percent this month, from 2.1 percent in August. Slower inflation helps preserve the purchasing power of the fixed payments from bonds.
Germany’s bonds returned 2.4 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities rose 1.5 percent, while Ireland’s gained 26 percent.
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