Bloomberg News

Spanish Bonds Head for Their Worst Week Since August

October 26, 2012

Spain’s 10-year bonds had their worst week since August after a government report showed the nation’s jobless rate climbed to a record, adding to evidence the economy is contracting.

Two-year notes also dropped this week after the central bank said three days ago that gross domestic product shrank for a fifth quarter. German bunds rose today as French household sentiment worsened, boosting demand for the region’s safest assets. Spanish securities pared their weekly decline after the European Union and the European Central Bank said the bailout of the country’s banks was “on track”.

“Contracting pressures in the economy remain persistent” in Spain, said Elwin de Groot, a senior market economist at Rabobank Nederland in Utrecht. “It will be very hard for the Spanish government to achieve its budget targets. It is likely to be negative for the bonds.”

Spain’s 10-year yield climbed 22 basis points, or 0.22 percentage point, this week to 5.59 percent at 4:37 p.m. London time, the biggest increase since the period ended Aug. 31. The 5.85 percent bond due in January 2022 dropped 1.575, or 15.75 euros per 1,000-euro face amount, to 101.815. The yield fell three basis points today.

The two-year note yield jumped 31 basis points this week to 3.06 percent.

Unemployment in Spain increased to 25.02 percent in the third quarter from 24.6 percent in the previous three months, the National Statistics Institute said in Madrid. That is the highest since at least 1976, the year after dictator Francisco Franco’s death led Spain to democracy.

Economy Shrinks

Spanish GDP declined 0.4 percent in the three months through September from the previous quarter, the central bank said in its monthly bulletin released Oct. 23.

JPMorgan Asset Management cut its holdings of Spanish securities this week to match the benchmark used to monitor performance as El Confidencial said the nation would miss its budget-deficit target, according to Iain Stealey, a portfolio manager at the International Fixed-Income Group in London.

Spain may struggle to boost its economy as the government attempts to impose the deepest budget cuts in three decades, said Douglas Renwick, a director at Fitch Ratings in Barcelona.

“The economic impact might be worse than is currently being anticipated, that is certainly a risk,” he said in an interview on Bloomberg Television’s “On The Move” with Francine Lacqua.

‘Successful Program’

Spanish bonds gained today after the European Union and ECB said the first aid disbursements for the nation’s banks may be ready soon. EU authorities have completed the first review of Spain’s financial-sector bailout, which may be as much as 100 billion euros.

“Overall, the findings of this mission point to a successful program whose implementation is on track,” the ECB and the European Commission, the EU’s executive, said in a joint statement.

German bunds extended a weekly gain after France’s national statistics office Insee said its measure of household sentiment in the nation dropped to 84 this month from 85 in September.

The 10-year bund yield declined four basis points to 1.54 percent, having dropped five basis points this week. France’s 10-year yield was little changed at 2.25 percent.

Italy Auction

Italian bonds fell as the nation sold a combined 4 billion euros of inflation-linked and zero-coupon debt.

Italy auctioned 3 billion euros of zero-coupon debt due in September 2014 at a yield of 2.397 percent, compared with 2.532 percent at the previous sale on Sept. 25. The nation also sold a combined 1 billion euros of inflation-linked debt maturing in September 2021 and September 2026.

The yield on Italian 10-year bonds climbed four basis points to 4.90 percent.

Volatility on Portugal’s government bonds was the highest in the euro-region markets today, followed by the Netherlands, according to measures of 10-year or equivalent maturity debt, the spread between two- and 10-year securities, and credit default swaps.

German bonds returned 2.5 percent this year through yesterday according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spain’s securities rose 2.7 percent, and France’s gained 8.1 percent.

To contact the reporters on this story: David Goodman in London at dgoodman28@bloomberg.net; Lucy Meakin in London at lmeakin1@bloomberg.net

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


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