Spain’s bonds slumped, with 10-year yields rising to a euro-era high, on speculation more regions will follow Valencia in asking for financial aid, increasing concern the country will need a sovereign bailout.
Germany’s bonds outperformed their euro-area peers, with two- and five-year yields reaching record lows, as Der Spiegel magazine reported the International Monetary Fund will stop paying rescue funds to Greece, citing unidentified European Union officials. Italy’s 10-year yield climbed to a six-month high and Greek bonds tumbled. German 30-year bunds are forming a bubble, according to Carl Weinberg, founder and chief economist of High Frequency Economics.
“The probable bailouts of some Spanish regions is weighing on markets and pushing up yields,” said Craig Veysey, head of fixed income at Principal Investment Management Ltd. in London, part of Sanlam Group, which manages $72 billion. “There is concern that Spain might be looking for a sovereign bailout sooner rather than later as a result of having to bail out the regions. Yields at current levels aren’t viable.”
Spain’s 10-year yield rose 23 basis points, or 0.23 percentage point, to 7.50 percent as of 5 p.m. in London after climbing to 7.565 percent, the highest since November 1996. The 5.85 percent bond due in January 2022 dropped 1.435 or 14.35 euros per 1,000-euro ($1,208) face amount, to 89.015. The yield jumped 60 basis points last week.
The extra yield investors demand to hold Spain’s 10-year debt over similar-maturity bunds widened as much as 33 basis points to a record 643 basis points.
Catalonia, Castilla-La-Mancha, Murcia, the Canary Islands, the Balearic Islands are among six Spanish regions that have said they may ask for aid from the central government after Valencia sought a bailout on July 20, Spanish newspaper El Pais reported. Regions need 26.4 billion euros to redeem bonds due this year and finance deficits, a separate report in El Mundo said, citing a budget ministry document. Spain has 17 regions.
Spanish bonds also declined after central bank estimates showed the euro area’s fourth-largest economy shrank 0.4 percent in the second quarter from the previous three months.
Spanish two-year yield climbed 77 basis points to 6.53 percent after surging as much as 99 basis points, the biggest intraday gain in the euro era.
“Spain would need a bailout if yields stay where they are for another couple of months,” Georg Grodzki, head of credit research at Legal & General Investment Management Ltd. in London, which manages $596 billion of assets, said in an interview on Bloomberg Television’s “On the Move” with Francine Lacqua. Italy would then be “an open target for the next wave of attacks,” he said.
The difference between the bid and ask yields on 10-year Spanish bonds, an indicator of market liquidity, widened to as much as 15 basis points, the most in at least 30 trading days, according to data compiled by Bloomberg. The bid-offer spread was six basis points as recently as July 5.
Volatility on Spanish bonds was the highest in developed markets today followed by Italy, according to measures of 10- year debt, the spread between two- and 10-year securities and credit-default swaps.
The cost of insuring Spanish debt jumped as much as 31 basis points to a record 636, according to data compiled by Bloomberg.
Germany’s 10-year yield fell as low as 1.127 percent, matching the June 1 record, before being little changed at 1.18 percent. The two-year yield was at minus 0.06 percent, below zero for a 12th straight day, after declining to a record minus 0.080 percent.
Yields less than zero mean investors who hold the debt to maturity will receive less than they paid to buy them.
German 30-year yields climbed two basis points to 2.08 percent, compared to their decade average of 4.05 percent.
“Germany is not safe,” High Frequency’s Weinberg said in an interview on Bloomberg Radio’s “Surveillance” with Tom Keene and Sara Eisen. “They’re on the hook for 27.3 percent of the cost of fixing everything in Europe. If Europe folds, Germany goes with it.” The 30-year bonds are in a “huge bubble,” said Weinberg, who is based in Valhalla, New York.
Greek bonds dropped as the nation’s creditors prepared to assess how far off course the country is from bailout targets.
The yield on Greece’s 2 percent bond due in February 2023 jumped 199 basis points to 27.57 percent. The price dropped to 16.21 percent of face value. The so-called troika of Greece’s international lenders arrives in Athens tomorrow.
Italy’s bonds slumped. The 10-year yield climbed 17 basis points to 6.34 percent after reaching 6.43 percent, the highest since Jan. 19.
Yields on government securities in Finland, the Netherlands, Norway, Sweden, Switzerland, and the U.K. all fell to records as investors sought the safest fixed-income assets. U.S. Treasury five-, 10- and 30-year yields also slid to all- time lows.
The euro weakened below $1.21 for the first time since June 2010, and fell below its lifetime average of $1.2087. A gauge of European bank stocks dropped 2.7 percent.
Germany sold 2.7 billion euros of 12-month bills at a yield of minus 0.054 percent, and France also auctioned short-maturity securities.
French borrowing costs may increase if the region’s debt turmoil worsens, according to Myles Bradshaw, executive vice president and money manager at Pacific Investment Management Co. in London.
“At the moment, investors are happy to take risk in France, Belgium and Austria,” he said on Bloomberg Television’s “The Pulse” with Guy Johnson. “The fundamentals in France are not perfect, they have a lot of fiscal adjustment to make and you don’t get a lot of risk premium for those risks. If the crisis intensifies then increasingly you will see the semi-core of Europe coming under pressure.”
German debt returned 4.6 percent this year through July 20, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities lost 7.6 percent, and Italy’s debt rose 6.8 percent.
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