Bloomberg News

Spain’s 10-Year Bonds Gain as Downgrade Raises Bailout Prospects

October 13, 2012

Spain’s 10-year bonds advanced for a second week after Standard & Poor’s cut the nation’s debt rating to one level above non-investment grade, increasing speculation the country is poised to request a sovereign bailout.

Ten-year rates fell to the lowest in almost a month even after Deputy Prime Minister Soraya Saenz de Santamaria said two days ago that Spain wants to see consensus among European governments before deciding whether to seek help. German bunds, the region’s benchmark securities, rose after the International Monetary Fund lowered its forecasts for euro-region gross domestic product, underlining the fragility of the economy.

“The bulk of the attention will continue to be on Spain and whether they will ask for aid,” said Luca Cazzulani, a senior fixed-income strategist at UniCredit SpA in Milan. “Bunds have done a bit better this week. The IMF reports were very cautious about the outlook and there’s ongoing uncertainty about the euro region.”

Ten-year Spanish yields fell six basis points, or 0.06 percentage point, last week to 5.63 percent at 4:58 p.m. London time yesterday. They reached 5.61 percent, the lowest since Sept. 14. The 5.85 percent securities maturing in January 2022 climbed 0.43, or 4.30 euros per 1,000-euro ($1,294) face amount, to 101.555.

Rating Cut

Standard & Poor’s cut Spain’s sovereign-debt rating by two levels to BBB- on Oct. 10, citing euro-region peers’ backtracking on a pledge to sever the link between the sovereign and its banks. Moody’s Investors Service is studying a possible downgrade for the nation from its current Baa3 level, the lowest investment-grade rank with that company. A bailout plan would enable European authorities to ease Spanish borrowing costs in return for economic reforms.

Spain will auction 12-month and 18-month bills on Oct. 16. It is also due to sell 4 percent securities maturing in 2015, 4.25 percent notes due in 2016 and 5.85 percent bonds due in 2022 on Oct. 18. European leaders will meet in Brussels for a two-day summit on Oct. 18 and 19.

German 10-year bund yields fell eight basis points over the week to 1.45 percent. The rate touched 1.44 percent yesterday, the lowest since Oct. 4.

The euro-area economy will contract 0.4 percent this year, 0.1 percentage point lower than forecast in July, the IMF predicted in its World Economic Outlook on Oct. 9. The region will expand 0.2 percent in 2013, less than the 0.7 percent forecast by the fund three months ago.

German government bonds returned 3 percent this year through Oct. 11, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies, outperforming Spanish bonds, which gained 1.8 percent.

To contact the reporter on this story: Emma Charlton in London at echarlton1@bloomberg.net

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


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