Spanish Government Bonds Decline After Bill Auctions; Belgian Debt Slides

Spain’s bonds declined, pushing two- year yields toward the highest since 2000, as financing costs surged at bill auctions today amid concern the new government will struggle to rein in the nation’s debt levels.

The country’s 10-year securities dropped for a second day after Maria Dolores de Cospedal, deputy leader of the People’s Party that won the Nov. 20 general election, said Spain needs a euro-region accord to “save and guarantee” its solvency. Belgian 10-year yields reached the highest in nine years after coalition talks were suspended. Italian, French and Austrian debt underperformed benchmark German bunds amid concern the region’s debt crisis is spreading.

“The market is clearly worried about how banks and states are going to fund themselves,” said Vincent Chaigneau, global head of interest-rate strategy at Societe Generale SA in Paris. “It requires some strong policy action and markets are going to remain quite tense.”

The two-year Spanish yield climbed 18 basis points to 5.76 percent at 4:10 p.m. London time, after reaching 5.83 percent on Nov. 17, the most since August 2000. The 2.5 percent note due October 2013 fell 0.295, or 2.95 euros per 1,000-euro ($1,352) face amount, to 94.185. The rate on bonds sold last week that mature in January 2022 stayed at 7 percent for a second day.

Spain sold three-month bills today at an average yield of 5.11 percent, compared with 2.292 percent at the previous auction on Oct. 25. The rate was the highest since at least 2004. The nation sold six-month bills at an average yield of 5.227 percent, versus 3.302 percent.

Leaders Speak

After sweeping to power with the biggest majority in three decades, PP leader Mariano Rajoy spoke to German Chancellor Angela Merkel yesterday, Cospedal told reporters in Madrid. He told her that “those countries that meet their obligations and responsibilities must be helped by European institutions,” Cospedal said.

Germany has no alternative plan for tackling the regional crisis, Michael Meister, a senior lawmaker in Merkel’s coalition, said today. “We don’t have any new bazooka to pull out of the bag,” Meister, the Christian Democratic bloc’s finance spokesman and deputy leader in parliament, said in Berlin.

Belgian bonds declined as Elio Di Rupo offered to resign from leading negotiations on a coalition after the six parties involved failed to agree about how to cut the budget deficit. The nation may face European Union sanctions as early as next month for failing to tackle debt that’s projected to widen in 2012.

Belgian Rating Risk

The failure of politicians to seal a coalition deal “will not bode well for the Belgian bond markets and may result in ratings downgrade pressure,” Alessandro Mercuri, an interest- rate strategist at Lloyds Bank Corporate Markets in London, wrote in an e-mailed note today.

The yield on the country’s 10-year bonds rose 26 basis points to 5.08 percent, after reaching 5.10 percent, the highest since July 2002. The difference in yield, or spread, between the securities and benchmark German bunds widened to 317 basis points, after reaching a euro-era record 321 basis points on Nov. 17.

Italian bonds dropped for a second day, with two-year yields climbing 42 basis points to 6.82 percent, surpassing the 10-year rate of 6.80 percent. The securities fell even after the European Central Bank was said by three people to have bought Italian debt today.

French 10-year bonds fell, widening the yield spread to German bunds by seven basis points to 162 basis points.

The Austrian-German spread expanded 11 basis points to 159 basis points.

Spanish bonds handed investors a 2.1 percent loss this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Belgian securities fell 2 percent while German bunds returned an 8.3 percent profit.

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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