Spanish 10-year government bonds dropped, heading for a weekly decline, as the nation said it will auction benchmark securities next week and European finance ministers put off decisions on aid for the nation.
Spain’s two-year note also slid as officials said Spain will unveil reforms to boost the economy, holding back from an aid request that may include bond purchases by the European Central Bank. Spain’s credit rating is under review by Moody’s Investors Service. Germany’s 10-year bunds headed for their biggest two-week drop since November after the Federal Reserve said it will take further steps to underpin the U.S. economy.
“Supply is going to be a burden until there’s a concrete backstop,” said Orlando Green, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “We still need clarification on what Spain is looking to do. Are they going to try and tough it out for a while? Maybe that’s playing on the market’s mind.”
Spain’s 10-year yield climbed 15 basis points, or 0.15 percentage point, to 5.79 percent at 4:50 p.m. London time, rising 16 basis points in the week. The 5.85 percent bond due January 2022 fell 1.105, or 11.05 euros per 1,000-euro ($1,314) face amount, to 100.425. The two-year note yield rose 19 basis points to 3.14 percent.
Spain said it will auction the 5.85 percent securities due 2022 for the first time since Aug. 2 as well as 3.75 percent notes due 2015 on Sept. 20.
The nation also plans to sell 8 billion euros of bonds in a private placement to banks as part of its efforts to fund a bailout facility for its cash-strapped regions, the Economy Ministry said in a statement yesterday. In the first stage starting on Sept. 21, it will sell 3 billion euros of a new floating-rate note maturing in 2016 as well as existing securities maturing in 2015 to 2017.
Moody’s said on Aug. 30 it would probably continue a review of Spain’s credit rating through the end of September to get more information on support measures for the nation. The company has assigned the nation a Baa3 ranking, one level above junk.
“The threat of a Spanish downgrade below investment grade might increasingly weigh on market sentiment over the next two weeks,” said Norbert Aul, a rates strategist at Royal Bank of Canada in London. “Also, supply is pushing next week with a new three-year benchmark and the private placement,” he said referring to shorter-maturity debt.
“However, we expect the front-end of the Spanish curve to remain relatively safe against the prospect of an ECB intervention in the future,” he said.
Finance ministers meeting in Cyprus looked to a fresh set of reforms to rebuild confidence in Spain’s economic management and said the fate of Greece’s 240 billion-euro rescue program won’t be decided until late October, possibly at a crisis summit of leaders.
Officials said Spain will unveil new reforms by the end of the month that cover a possible increase in the retirement age, a shift to consumption taxes and the deregulation of closed professions. Spanish Economy Minister Luis de Guindos pledged a “plan of reforms to boost growth and competitiveness.”
“Spain may not for the near term find it necessary” to request aid, according to Bill O’Neill, chief investment officer for Europe, Middle East and Africa at Merrill Lynch Wealth Management in London. “The market is aware now that there’s a mechanism in place to support one- to three-year yields.”
O’Neill spoke in an interview on Bloomberg Television’s “The Pulse” with Maryam Nemazee.
Germany’s 10-year yield rose 15 basis points to 1.71 percent after adding as much as 16 basis points to 1.72 percent, the highest since April 30. The yield added 19 basis points in the week and has climbed from 1.33 percent on Aug. 31, the biggest two-week increase since Nov. 25.
The rate advanced through its 200-day moving average today for the second time since July 2011. It may climb to the highest since April if it closes above that level because it would “add to bearish market sentiment” toward the securities, George Davis, chief technical analyst for fixed-income and currency strategy at Royal Bank of Canada (RY) in Toronto, wrote in a client note dated yesterday.
The ECB’s plan to buy unlimited amounts of bonds pushed the yield above a key long-term trendline at 1.53 percent, he wrote.
Demand for the relative safety of bunds slumped after the Fed yesterday announced its third round of large-scale asset purchases since 2008, with the difference that it didn’t set any limit on the ultimate amount it would buy or the duration of the program. Instead, Bernanke said stimulus will be expanded until the Fed sees “sustained improvement” in the labor market.
Volatility on German bonds was the highest in euro-area markets today, followed by the Netherlands and Finland, also perceived as haven assets, according to measures of 10-year or equivalent-maturity debt, the spread between two-year and 10- year securities and credit-default swaps.
Spanish bonds returned 1.7 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian securities advanced 15 percent, while German debt made 2.5 percent.