Spanish Bonds Fall Versus Germany's After Moody Warns Spain About Rating
Spanish government bonds underperformed German debt after Moody’s Investors Service said it will probably downgrade the Iberian nation’s credit rating. Portuguese and Irish debt fell.
German 10-year government bond yields fell to the least in a week after reports showed U.S. gross domestic product expanded more slowly than forecast in the second quarter, and retail sales in the region’s biggest economy dropped more than forecast in June. Two-year yields dropped to the lowest in four days as data from the European Union statistics office in Luxembourg showed euro-region unemployment stayed at 10 percent last month and inflation accelerated to 1.7 percent in July, the fastest pace in 1 1/2 years.
“There has been an increase in risk aversion and that’s helping the core European countries rally while the periphery isn’t benefiting,” said Karsten Linowsky, a fixed-income strategist at Credit Suisse Group AG in Zurich. “These comments from Moody’s and sentiment out of the U.S. are adding to this.”
Spanish 10-year yields were two basis points lower at 4.23 percent as of 4:48 p.m. in London while German bund yields slipped four basis points to 2.67 percent. German two-year note yields declined five basis points to 0.78 percent.
Retail Sales
Portuguese bonds returned 3.7 percent this month, making them the biggest gainer in the euro region, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish debt handed investors 3.5 percent and Irish securities 3.2 percent. U.K. gilts lost 1 percent and German debt 0.9 percent, the worst returns among the 26 countries tracked in the indexes.
The Portuguese 10-year yield jumped 10 basis points to 5.23 percent today. The extra yield investors demand to hold the debt instead of bunds, Europe’s benchmark government security, climbed 12 basis points to 251 basis points.
German retail sales slipped 0.9 percent from May, when they rose 3 percent, the Federal Statistics Office in Wiesbaden said. Economists forecast a decline of 0.2 percent, the median of 14 estimates in a Bloomberg survey showed. In the year, sales rose 3.1 percent.
Italian debt fell as Prime Minister Silvio Berlusconi took steps to expel Gianfranco Fini from the People of Liberty party they co-founded, a move that may end the premier’s parliamentary majority two years into his term.
Spanish Redemption
“This may reduce the Italian government’s ability to govern,” said Matteo Regesta, an interest-rate strategist at BNP Paribas SA in London. “It is worth keeping an eye on Italian bonds.”
Italian 10-year yields were little changed at 3.96 percent, while two-year yields surged 15 basis points to 1.91 percent.
Spanish bonds were supported as investors prepared to receive a 16 billion-euro payment from the redemption of a five- year Spanish note today, the last bond repayment for Spain until April 2011, according to data compiled by Bloomberg. There’s also an 8.3 billion-euro interest payment, according to Nomura International Plc.
“Spain is very highly rated and I can’t say where that rating will end up, but it’s likely to go down a bit,” Steven A Hess, senior credit officer at Moody’s, said in an interview in Sydney yesterday.
Investors should end a bet, opened on July 9, that Spanish five-year notes will outperform similar-maturity German debt, Goldman Sachs Group Inc. said.
“We continue to see value in EMU sovereign-debt markets, but the pace of spread compression is likely to be moderate given how fast spreads have tightened recently,” Goldman Sachs analyst Michael Vaknin in London wrote today in an e-mailed research note.
The yield premium, or spread, investors demand to hold Spanish five-year notes instead of German debt, the benchmark for the euro region, was 130 basis points, according to Bloomberg generic data. The spread was 201 basis points on July 9.
To contact the reporter on this story: Matthew Brown in London at mbrown42@bloomberg.net
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