Bloomberg News

Spanish Government Bonds Decline Before Stress Test Results

September 28, 2012

Spanish 10-year government bonds fell, paring the biggest monthly drop in yields this year, before the nation reveals the results of stress tests on its banks as it seeks to avoid a full financial bailout.

The declines pushed the yield above 6 percent for the third day. German bunds extended their longest run of quarterly gains since 1998 even as a report showed euro-area inflation unexpectedly accelerated in September. French bonds headed for their first weekly advance since the five-day period ending Aug. 24 as President Francois Hollande’s government delivered its budget. Moody’s Investors Service may announce a review of Spain’s credit rating.

“I don’t see anything supportive at the moment” for Spanish bonds, said Gianluca Ziglio, an interest-rate strategist at UBS AG in London. “The stress test results are being announced later today and the Moody’s decision is also coming up. I am pretty constructive on bunds in this kind of environment.”

Spanish 10-year yields rose five basis points, or 0.05 percentage point, to 6 percent at 2:15 p.m. London time. They have climbed 24 basis points this week, still down 86 basis points since the end of August, the biggest drop since December. The 5.85 percent bond due in January 2022 fell 0.375, or 3.75 euros per 1,000-euro ($1,293) face amount, to 98.92. Italian 10- year yields were little changed at 5.12 percent.

Spanish bonds have risen this quarter after the European Central Bank said it would buy the debt of cash-strapped nations to lower borrowing costs.

Spanish Hole

The release of the results of the independent stress test conducted by consulting firm Oliver Wyman will reveal the size of the hole in the Spanish banking system, which is reeling from a property crash. Spain agreed a 100 billion-euro bailout for its banks in July. Yesterday, the nation backed an austerity package as it seeks to head off a bailout that may subject it to budget cuts.

Germany’s 10-year yield fell two basis points to 1.44 percent, after touching 1.42 percent, the lowest level since Sept. 5. The yield has dropped 14 basis points since the end of June, having fallen in each of the past six quarters.

Demand for German bonds, perceived to be among the region’s safest assets, was sustained even as the ECB cut its deposit rate to zero in July and this month announced its asset-purchase plan. Bunds have returned 1.1 percent in the past three months, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities rose 4.2 percent and Italy’s earned 5.6 percent.

‘Uncertainty’ Remains

“We still have a lot of uncertainty about the economic outlook and also a lot of liquidity measures by the central bank,” said Karsten Linowsky, a fixed-income strategist at Credit Suisse Group AG (CSGN) in Zurich. “This is overall keeping yields low. In the short term, a lot will depend on the European measures. This will drive the performance.”

Ten-year bunds will probably be little changed for the rest of the year, and the yield may then rise toward 2 percent over the next 12 months if the economy improves, Linowsky said. The yield will reach 1.70 percent in December and 2.10 percent at the end of September 2013, according to the median estimate of economists and analysts in surveys compiled by Bloomberg.

Consumer prices in the 17-nation euro region increased 2.7 percent from a year earlier after a 2.6 percent gain in August, the European Union’s statistics office in Luxembourg said in a flash estimate today. The median forecast of 40 economists in a Bloomberg News survey was for the rate to fall to 2.4 percent.

Stalled Gains

Gains by Spanish bonds have stalled as investors awaited to see if the country will seek help from the ECB.

“The market priced in the benefits of the ECB’s actions and we’ve seen some procrastination from the Spanish government since then,” Niall O’Leary, Dublin-based head of portfolio strategy for Europe, Middle East and Africa at State Street Global Advisors, the money-management unit of custody bank State Street Corp. (STT:US), which oversees about $1.9 trillion in assets, said in an interview yesterday. “There’s a bit of cat and mouse going on in the market.”

Moody’s said on Aug. 30 that it would probably extend its review of Spain’s credit rating, which started June 13, “through” the end of this month in order to get more information on support measures for the nation. Moody’s currently ranks Spain at Baa3, one step above junk.

France’s 10-year yields fell two basis points to 2.18 percent. Two-year yields were at 0.19 percent.

Hollande’s first budget was centered on tax increases aimed at raising 20 billion euros, including a 75 percent levy on incomes over 1 million euros. The premier aims to reduce the deficit to 3 percent of output from 4.5 percent in 2012. The budget predicts growth of 0.8 percent.

The extra yield investors demand to hold French 10-year bonds over similar-maturity German bunds was 74 basis points today after touching 77 basis points, the highest since Sept. 6.

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net; David Goodman in London at dgoodman28@bloomberg.net

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


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