Spanish Bonds Decline as Rajoy Warns of Difficult Times; German Bunds Gain

Spanish bonds dropped, extending six weeks of losses, after Prime Minister-elect Mariano Rajoy told the nation to brace for difficult times as he starts work on tackling the euro-area’s third-largest deficit.

Italy’s two-year notes fell as concern the regional debt crisis is worsening pushed up dollar-funding costs for European banks. German bonds rose as the Finance Ministry said economic growth is slowing and as U.S. lawmakers struggled to agree on deficit cuts, spurring demand for safer assets. The European Central Bank said it boosted sovereign-debt purchases last week.

“Even with a majority, it will be a hard life for the Spanish government,” said Alessandro Giansanti, a senior interest-rates strategist at ING Groep NV in Amsterdam. “The market is realizing the situation in Spain is not too rosy compared with Italy.”

The Spanish 10-year yield rose 17 basis points to 6.55 percent at 4:08 p.m. London time, after climbing to a euro-era record 6.78 percent on Nov. 17. The 5.5 percent bond due in April 2021 fell 1.14, or 11.40 euros per 1,000-euro ($1,347) face amount, to 92.73. Two-year rates climbed 14 basis points to 5.57 percent.

Rajoy, whose People’s Party swept the ruling Socialists from power after eight years, said on Nov. 18 he hoped Spain wouldn’t need a bailout before he can be sworn in as prime minister in a month. He inherits a stalled economy with the euro area’s highest jobless rate and a deficit of more than twice the euro-region limit.

The extra yield investors demand to hold 10-year Spanish securities instead of German bunds expanded 24 basis points to 465 basis points, after reaching 503 basis points on Nov. 18.

Italian Notes

Italian notes snapped a three-day gain as the three-month cross-currency basis swap, the rate banks pay to convert euro payments into dollars, reached 136.8 basis points below the euro interbank offered rate in London, the most expensive since December 2008.

The securities fell even as the European Central Bank was said to purchase them. The central bank bought the notes according to three people with knowledge of the transactions, who declined to be identified because the trades are confidential. An ECB spokesman declined to comment.

Italian two-year yields increased 25 basis points to 6.37 percent. Ten-year rates climbed three basis points to 6.67 percent, widening with spread with German bonds by nine basis points to 476 basis points.

German Bunds

German bonds rose for the first time in five days as the Finance Ministry said Europe’s largest economy is expanding “noticeably slower” in the final quarter as demand for export tapers off.

The securities also advanced as the Bundesbank cut its growth forecast for next year and ECB Executive Board member Juergen Stark said while third quarter growth in the euro area economy “surprised on the upside,” he expected “stronger damping effects in the fourth quarter.”

Bunds rallied as a U.S. Democratic Party aide said the deficit-cutting congressional supercommittee will probably announce it has failed to reach agreement on at least $1.2 trillion federal budget savings, raising the prospect of another U.S. credit downgrade.

The Stoxx Europe 600 Index slid 3 percent and the Standard & Poor’s 500 Index dropped 2.3 percent.

The yield on the 10-year bund fell six basis points to 1.91 percent, after climbing eight basis points last week.

Greek Notes

Greek two-year notes dropped for a second day as the European Commission said it still hasn’t received commitments by the country to the Oct. 26 deal struck with European leaders to move its rescue forward.

Antonis Samaras, leader of Greece’s New Democracy Party, won’t sign a document pledging his commitment to the accord, the Athens News Agency reported two days ago.

The Greek two-year rate climbed 57 basis points to 112.06 percent after reaching a record 117.5 percent. The price fell to 29.42 percent of face value.

Jefferies Group Inc., a New York-based investment bank, said it further trimmed its holdings in Greece, Ireland, Italy, Portugal and Spain. “We have further reduced our total gross exposure to Greece, Ireland, Italy, Portugal and Spain by almost another 50 percent,” according to a letter placed on the company’s website today.

The Frankfurt-based ECB said it settled 7.99 billion euros of bond purchases in the week through Nov. 18, up from 4.48 billion euros the previous week.

Volatility on Italian and Spanish sovereign debt was the highest among developed-country markets today, according to measures of 10-year bonds, credit-default swaps, and the spread between two- and 10-year securities. The cumulative change was 4.9 times the 90-day average for Italy, and three times for Spain, the Bloomberg gauge showed.

German bunds returned 7.9 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish debt handed investors a 1.4 percent loss. French securities were little changed.

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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