Italian, Spanish Government Bonds Plunge, as Europe's Debt Crisis Deepens
Italian, Spanish Government Bonds Plunge
Victor Sokolowicz/Bloomberg
The Banca d'Italia in Rome, Italy.
The Banca d'Italia in Rome, Italy. Photographer: Victor Sokolowicz/Bloomberg
Italian, Spanish Government Bonds Plunge
Denis Doyle/Bloomberg
The Spanish flag flies at Plaza Colon in Madrid.
The Spanish flag flies at Plaza Colon in Madrid. Photographer: Denis Doyle/Bloomberg
Italian and Spanish government bonds fell, driving the extra yield investors demand to hold the securities instead of German bunds to euro-era records, as Europe’s debt crisis intensified.
The drop pushed the yield spread between 10-year Italian securities and similar-maturity German debt to more than 2 percentage points for the first time since 1997. The Belgian yield premium over bunds reached a record after its borrowing costs rose at a sale of 2.8 billion euros ($3.7 billion) of treasury bills. The cost of insuring debt for Italy, Spain, Portugal and Ireland surged to records, stocks and the euro slid and U.S. Treasuries advanced.
“Contagion risk is still high on the agenda,” said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. “Nobody wants to expose themselves to any peripheral risks.”
The Italian 10-year bond yield rose a sixth day, gaining three basis points to 4.68 percent at 4:34 p.m. in London, after reaching 4.88 percent earlier today. The 3.75 percent security due in March 2021 fell 0.26, or 2.60 euros per 1,000-euro face amount, to 92.89. The spread with 10-year German bonds increased to as much as 212 basis points, a euro-era record.
The euro fell as much a 1.2 percent to $1.2969, dropping below $1.30 for the first time in two months, and slid 1.6 percent to 108.86 yen.
‘Different Ballgame’
“The problems in European government bond markets are now spreading to Italy,” said Norbert Aul, a fixed-income strategist at Royal Bank of Canada Europe Ltd. in London. “This is a whole different ball game because Italy is the biggest debt issuer in the euro area. The European Central Bank and the European Commission will have to come out and respond soon.”
The cost of insuring the debt of Italy rose 24 basis points to 270, Spain increased 16 basis points to 368, Portugal was 12 higher at 552 and Ireland was up 4 at 608, according to CMA prices for credit-default swaps. Swaps on Greece were little changed at 969 basis points.
The 10-year Treasuries yield fell six basis points to 2.76 percent. The MSCI World Index of stocks fell 0.5 percent.
The average yield for 10-year debt from Greece, Ireland, Portugal, Spain and Italy reached a euro-era record as speculation intensified that other nations will require external support after Irish Prime Minister Brian Cowen conceded on Nov. 21 that the country needed a rescue.
As well as drawing up an 85 billion-euro bailout for Ireland two days ago, European governments also fleshed out a plan to give the International Monetary Fund a role in determining losses for bondholders, should countries have difficulties meeting obligations after 2013.
‘Throwing in Towel’
Irish Justice Minister Dermot Ahern said ECB officials tried to force Ireland to start seeking a bailout earlier this month, and European officials are now trying to do the same to Portugal.
“Clearly there were people from outside this country who were trying to bounce us in as a sovereign state, to making an application, throwing in the towel before we had even considered it as a government,” he told Irish state broadcaster RTE in an interview today. “And if you notice, they are doing the same with Portugal now.”
Asked about who was pressuring Ireland, he said “quite obviously people from within the ECB.”
The ECB bought Irish government bonds in bigger amounts than it typically does today, according to two people with knowledge of the transactions.
Ten-year Irish yields were two basis points lower at 9.44 percent, and similar-maturity Portuguese bond yields fell 12 basis points to 7.17 percent.
ECB Pressure
ECB President Jean-Claude Trichet said “observers” are underestimating the determination of European policy makers to shore up the euro region’s stability.
“I don’t believe that financial stability in the euro zone could really be called into question,” Trichet told lawmakers in Brussels today.
The yield on 10-year Spanish bonds increased for an 11th straight day, climbing 11 basis points to 5.57 percent, after a 25 basis-point jump yesterday. That pushed up the yield spread to German debt to 284 basis points.
The ECB may have to step up purchases of Spanish government bonds and backstop its banking system if the country runs into financing difficulties, Citigroup Inc. Chief Economist Willem Buiter said.
Spanish ‘Stretch’
“Once Spain needs assistance, the support of the ECB will be critical,” Buiter said in a note to investors yesterday. A Spanish crisis would “stretch the resources” of the bailout fund set up in May by European governments, “perhaps beyond its current limits,” he said.
Belgian 10-year yields rose 13 basis points to 4.03 percent. Borrowing costs increased as the nation raised 2.8 billion euros in sales of 105-day bills and 168-day securities. The yield premium over bunds touched a record 139 basis points.
The yield spread between French and German bonds reached the most since June, climbing to 48 basis points, as the crisis spread to euro-area nations with higher credit ratings than so- called peripheral nations.
German 10-year bonds rose, with the yield eight basis points lower at 2.68 percent. The Nuremberg-based Federal Labor Agency said today unemployment fell for a 17th month in November to 3.14 million, the lowest since December 1992.
Irish bonds lost 11 percent this month and 16 percent for the year to date, according to data compiled by Bloomberg and the European Federation of Financial Analysts Societies. Portuguese securities handed investors a 5.6 percent loss this month and Spanish debt dropped 6.6 percent.
To contact the reporter on this story: Paul Dobson in London at pdobson2@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
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