Bloomberg News

Spanish 10-Year Bonds Decline as Euro-Area Slips Into Recession

November 17, 2012

Spanish bonds fell, pushing 10-year yields to the highest level in six weeks, as a euro-area report showed the region’s economy contracted in the third quarter, pushing it into recession.

Spain’s 10-year yield climbed for a fourth consecutive week, the longest run of increases since June, as the nation’s government refrained from asking for aid from the European Central Bank’s Outright Monetary Transactions program. Germany’s two-year note yields were below zero percent every day this week. The nation sold the securities at a negative rate for the second time on record on Nov. 14, the first time since July.

“The euro area is in a technical recession which was to be expected to some extent,” said Norbert Aul, a rates strategist at Royal Bank of Canada in London. “The prevailing reluctance of the Spanish government to ask for aid is putting soft pressure on Spanish bonds.”

The yield on Spain’s 10-year bonds rose five basis points, or 0.05 percentage point this week, to 5.87 percent at 5 p.m. London time. The 5.85 percent bond maturing January 2022 fell 0.335, or 3.35 euros per 1,000-euro ($1,272) face amount, to 99.82. The rate climbed to 5.96 percent on Nov. 13, the most since Oct. 1.

Gross domestic product in the 17-nation euro area dropped 0.1 percent in the third quarter after a 0.2 percent decline in the previous three months, the European Union’s statistics office in Luxembourg said on Nov. 15. Spain’s economy shrank 0.3 percent, the fifth straight quarter of contraction, while Germany’s expanded 0.2 percent, separate data showed.

Negative Yields

German two-year notes yielded minus 0.034 percent. A negative yield means investors who hold the security until it matures will receive less than they paid to buy it.

Germany allotted 4.3 billion euros of securities maturing in December 2014 at an average yield of minus 0.02 percent. That compares with a record-low auction yield of minus 0.06 percent set on July 18.

The German 10-year bund yield was at 1.33 percent, after declining to 1.31 percent on Nov. 13, matching the lowest since Aug. 31. The rate dropped two basis points since Nov. 9, its fourth straight weekly fall and the longest run of declines since June.

Greece was this week granted an additional two years to reach budget-deficit goals in its bailout program. European finance ministers will be discussing ways of plugging the funding gap resulting from that extension at a meeting in Brussels on Nov. 20.

Output Data

A report due next week is forecast to show an index euro- area services and manufacturing output contracted for a tenth month in November. A composite index based on a survey of purchasing managers in both industries was 45.9 this month, from 45.7 in October, London-based Markit Economics will say on Nov. 22, according to the median estimate of 20 analysts in a Bloomberg News survey. A reading below 50 indicates contraction.

Germany is scheduled to sell 4 billion euros of 10-year bunds on Nov. 21, while Spain plans to auction securities maturing between 2015 and 2021 a day later.

German bonds returned 4 percent this year through Nov. 15, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities gained 2.1 percent, while Italy’s earned 18 percent.

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