Spanish-German Yield Spread Widens to Euro Record on Bank Funds

Spanish bonds fell, pushing 10-year yields to the most relative to benchmark German bunds since the euro was created, amid concern the nation’s lenders will need additional financial support to weather Europe’s debt crisis.

Spain’s two-year note yield climbed to the highest since December after nationalized lender Bankia group said it will seek 19 billion euros ($23.8 billion) of state support. German two-year note yields dropped to a record even as opinion polls showed greater backing for Greece’s pro-bailout political parties. Italian bonds declined as business confidence slid more than economists forecast and borrowing costs rose at a sale of zero-coupon notes.

“The weakness in Spain and Italy is primarily down to the Bankia rescue,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London. “The Greek polls offer some grounds for optimism but that’s a very short-termist view.”

The yield on Spain’s 10-year bond climbed 16 basis points, or 0.16 percentage point, to 6.47 percent at 4:31 p.m. London time. The 5.85 percent security due in January 2022 dropped 1.07, or 10.70 euros per 1,000-euro face amount, to 95.625.

The extra yield investors demand to hold the securities instead of their German counterparts expanded by 17 basis points to 511 basis points after reaching 514 basis points, the most since the euro’s introduction in 1999.

Spanish two-year yields increased 11 basis points to 4.46 percent after reaching 4.56 percent, the highest since Dec. 13.

Spanish Banks

Bankia SA shares fell 14 percent after tumbling as much as 29 percent in Madrid trading. Bankia (BKIA) was among three Spanish banks that had their credit ratings cut to junk by Standard & Poor’s on May 25, with the company citing Spain’s weakening economy. The nation is considering injecting debt issued by the government or its bank-rescue fund instead of cash into the lender, an economy ministry spokesman said.

Greece’s New Democracy, which supports the European Union’s aid plan, ranked first in all six opinion polls published two days ago as campaigning continued before next month’s election. The Stoxx Europe 600 index of shares was little changed after rising as much 0.9 percent. The euro strengthened 0.2 percent to $1.2537.

German two-year yields fell as much as two basis points to an all-time low of 0.027 percent. Five-year yields slipped to a record 0.419 percent, and 10-year yields dropped one basis point to 1.36. They fell to 1.351 percent on May 24, the least ever.

Italy’s two-year note fell for a second day, pushing the yield up 23 basis points to 3.92 percent. The 10-year yield climbed seven basis points to 5.74 percent.

Italian Sentiment

Italy’s manufacturing-sentiment index dropped to 86.2, the lowest since August 2009, from a revised 89.1 in April, the national statistics institute said. Economists predicted a reading of 88.6, according a Bloomberg News survey.

The nation sold 3.5 billion euros of zero-coupon notes due in May 2014 at an average yield of 4.037 percent, compared with 3.355 percent at the previous auction on April 24. Investors bid for 1.66 times the amount on offer, down from a so-called bid- to-cover ratio of 1.8. Italy also auctioned 751 million euros of inflation-linked debt.

Italian securities were the most volatile government bonds in euro-area markets today, followed by Spain’s, according to measures of 10-year bonds, two- and 10-year yield spreads and credit-default swaps.

The European Central Bank said today it didn’t make any government bond purchases for an 11th week.

Treasury 10-year futures fell 0.1 percent to 133 23/32.

German debt has returned 2.1 percent this month, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian securities have slipped 0.9 percent and Spanish debt dropped 2.9 percent.

-- Editors: Paul Dobson, Nicholas Reynolds

To contact the reporters on this story: David Goodman in London at dgoodman28@bloomberg.net; Keith Jenkins in London at kjenkins3@bloomberg.net

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

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