Italian, Spanish Yields Soar to Records; German Bunds Climb on Safety Bids

Italian and Spanish 10-year bond yields surged to euro-era records while German bunds rallied as contagion from the sovereign-debt crisis spread, piling pressure on Europe’s leaders to find measures to contain the turmoil.

Yields on two-year Greek, Irish and Portuguese debt also reached the highest since the introduction of the 17-nation shared currency, while benchmark bund yields sank to within 12 basis points of an eight-month low. European Central Bank President Jean-Claude Trichet reiterated his opposition to Greek debt restructuring as euro-area leaders prepared to meet in Brussels on July 21. Stocks fell on concern European banks may need to raise as much as 80 billion euros ($113 billion) of capital following stress tests on the lenders last week.

“It does not seem as if we are going to see an immediate solution to the debt crisis, so investors prefer to stay on the cautious side, and this is being reflected in German bunds,” said Kornelius Purps, a fixed-income strategist at UniCredit SpA in Munich. “There is no genuine reason to price Italy and Spain down. It’s general contagion. It’s an alarming signal to European leaders to come up with a solution that doesn’t create more contagion.”

Yields on 10-year Italian bonds increased 21 basis points to 5.96 percent as of 4:31 p.m. in London. Earlier, they surged to 6.03 percent, surpassing last week’s 6.02 percent peak, to reach the highest level since 1997. The spread, or yield gap, over benchmark German bunds widened to 331 basis points. The 4.75 percent Italian security due September 2021 fell 1.44, or 14.40 euros per 1,000-euro face amount, to 91.50. Two-year Italian yields climbed 30 basis points to 4.52 percent.

Spanish Yields, Bunds

Spanish 10-year yields rose 26 basis points to 6.33 percent, after reaching a euro-era record of 6.37 percent. The rise in Spain’s yields took the spread over bunds to 369 basis points. Greek two-year note yields surged 291 basis points to 35.98 percent, also a euro-era record.

Ireland’s two-year note yield reached 23.31 percent, while Portugal’s soared to 20.34 percent.

The 10-year German bund yield declined five basis points to 2.65 percent, after reaching 2.62 percent. The yield fell to 2.50 percent on July 12, the least since Nov. 12. Yields on two- year notes declined two basis points to 1.20 percent. It reached 1.05 percent on July 12, the least since Jan. 13.

Trichet Comment

Yields on the debt of so-called peripheral euro-area nations has soared, while German bunds have rallied, as European politicians clash over how to solve the region’s debt woes. The disagreement centers on whether a second Greek rescue plan should compel private holders of the Mediterranean nation’s debt to contribute toward bailout costs, a measure that ratings companies have warned would constitute a default.

Trichet told the Financial Times Deutschland in an interview published over the past weekend that Europe can surmount the crisis and that the euro remains “a highly credible currency.” He reiterated that the ECB will not accept bonds from a nation that defaults as collateral.

“In the eyes of the Governing Council, this would impair our ability to be an anchor of confidence and stability,” Trichet said, according to a transcript of the interview released yesterday by the Frankfurt-based ECB.

The Stoxx Europe 600 Index fell 1.8 percent, taking its slump from this year’s high in February to 10 percent, a decline that strategists define as a correction. Treasuries advanced, while the euro fell the most in almost a week against the dollar, shedding 1 percent.

Stress Tests

The eight banks that failed stress tests among 90 that were assessed by the European Banking Authority have a combined capital shortfall of 2.5 billion euros, the regulator said in a July 15 report. As many as 20 banks need to bolster capital by as much as 80 billion euros, JPMorgan Cazenove analysts led by Kian Abouhossein wrote in a note after the tests’ release.

France and Germany led an increase in the cost of insuring against default on European sovereign debt, prices from CMA showed. Credit-default swaps on France surged 9 basis points to a record 123 and Germany climbed 5 to 65 in London, the highest since March 2009.

Contracts on Greece jumped 77 basis points to 2,492, signaling an 88 percent probability of default within five years. Ireland climbed 41 basis points to 1,175, Italy increased 17 to 323 and Portugal rose 36 to 1,182, while Belgium was 9 higher at 214 and Spain was up 19 at 368, the highest since November.

The yield difference between French 10-year bonds and similar-maturity benchmark German bonds widened three basis points to 71 basis points. It has climbed from 38 basis points at the start of the month.

‘Sentiment Doubtful’

“As long as sentiment remains doubtful, then there is a risk of further spread-widening,” Purps said. “If sentiment improves then there is potential for massive spread-tightening, particularly in Spain and Italy, but also in the other European countries, like France, where spreads have been widening.”

Markets were further roiled by U.S. President Barack Obama’s July 15 admission that rival Republicans and Democrats are “running out of time” to resolve an impasse on how to balance the federal budget and raise the $14.3 trillion debt ceiling before an Aug. 2 deadline.

Standard & Poor’s last week said that there’s at least a 50 percent chance it will cut the U.S.’s AAA rating by one or two notches into the AA category within 90 days should the nation’s politicians fail to agree on how to lower the deficit.

German government bonds have handed investors 2.2 percent this year, while U.S. Treasuries have returned 3.7 percent, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian bonds have lost 3.2 percent, while Spain’s have declined 0.3 percent, the indexes show.

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

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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