Spanish Bonds to Fall as MEAG Sees 10-Year Yields Near 7%

Spanish 10-year bond yields may rise toward 7 percent amid the waning benefit of two rounds of extraordinary European Central Bank loans, according to MEAG Munich Ergo Asset Management GmbH.

A surge in Spain’s benchmark debt yield to the highest in more than four months may also push German bund rates to record lows, Andreas Grassl, the Munich-based deputy head of fixed income, said in an interview on April 12. Nations including Greece sought aid after yields breached 7 percent. The ECB lent euro-area banks more than 1 trillion euros ($1.31 trillion) in three-year loans in December and February to boost liquidity.

“We’re still in the debt crisis and it still isn’t solved,” said Grassl, who oversees about 23 billion euros. “In the next weeks we will see Spanish yields rise to between 6 and 7 percent as they try to find the correct level. If discussions about the euro breakup start again or if there’s a weakening of austerity measures bunds will have new low yields.”

Spain’s 10-year rates rose to 6.16 percent on April 16, the highest since Dec. 1, from this year’s low of 4.83 percent on March 1. Benchmark German yields fell to 1.639 percent on April 10, approaching the record-low 1.636 percent set on Sept. 23.

Spanish 10-year yields fell seven basis points, or 0.07 percentage point, to 5.82 percent at 12:57 p.m. London time, while bund yields were little changed at 1.73 percent.

Budget Struggle

Spain’s 10-year yields have surged almost 1 percentage point since March 1 on concern Prime Minister Mariano Rajoy will struggle to bring the nation’s deficit under control after announcing on March 2 the country would miss its 2012 budget- deficit goal. Concern that Spain may follow Greece, Ireland and Portugal in seeking a bailout has seen bunds rise as investors seek the safety of German assets.

MEAG, the asset-management arm of Munich Re, the world’s largest reinsurer, had 216 billion euros under management as of Dec. 31, according to its website.

The money manager had 1.9 percent of its fixed-income portfolio invested in Spanish debt as of Dec. 31, down from 2.7 percent a year earlier, according to data provided by the company. German debt made up 35 percent of the portfolio at the end of last year, compared with 30.7 percent at the close of 2010.

Spanish two-year note yields are now higher than before the ECB began offering its three-year loans in so-called longer-term refinancing operations.

ECB Purchases

The ECB will probably try to bring down Spain’s borrowing costs by buying the nation’s debt through the Securities Market Program, rather than through a third round of LTRO, Grassl said. The ECB has spent 214 billion euros buying debt from Greece, Ireland, Portugal, Italy and Spain since the SMP began in May 2010.

“The market is very nervous at the moment,” Grassl said. “They are only looking at the bad news, the only way to stabilize the market is through the ECB,” which will “intervene when yields get close to 7 percent.”

The ECB said two days ago it hadn’t settled any government bond purchases for a fifth-straight week.

It “should step up purchases of bonds,” Jaime Garcia- Legaz, a Spanish deputy minister in Luis de Guindos’s Economy Ministry, said in an interview on April 13.

The ECB owns about 7.3 percent of Spain’s government debt, according to a Morgan Stanley estimate in a research note published the same day.

To contact the reporter on this story: David Goodman in London at dgoodman28@bloomberg.net

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

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